Digital Business and Electronic Commerce: Strategy, Business Models and Technology (Springer Texts in Business and Economics) 3030634817, 9783030634810

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Springer Texts in Business and Economics

Bernd W. Wirtz

Digital Business and Electronic Commerce Strategy, Business Models and Technology

Springer Texts in Business and Economics

Springer Texts in Business and Economics (STBE) delivers high-quality instructional content for undergraduates and graduates in all areas of Business/Management Science and Economics. The series is comprised of self-contained books with a broad and comprehensive coverage that are suitable for class as well as for individual self-study. All texts are authored by established experts in their fields and offer a solid methodological background, often accompanied by problems and exercises.

More information about this series at http://www.springer.com/series/10099

Bernd W. Wirtz

Digital Business and Electronic Commerce Strategy, Business Models and Technology

Prof. Dr. Bernd W. Wirtz Information and Communication Management German University of Administrative Sciences Speyer Speyer, Germany

ISSN 2192-4333 ISSN 2192-4341 (electronic) Springer Texts in Business and Economics ISBN 978-3-030-63481-0 ISBN 978-3-030-63482-7 (eBook) https://doi.org/10.1007/978-3-030-63482-7 # The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

The Internet economy is characterized by its considerable dynamic and speed of change. The rapid digitization of numerous areas of life has resulted in a shift towards today’s information society. Since the beginning of the twenty-first century, digital business has increasingly gained in importance. Especially the ongoing digitization emphasizes the particular importance of digital business in today’s information society. The contents of this textbook are based on the German textbook Electronic Business, which was first published by Springer Gabler in 2000 and is in its seventh edition in 2020. In the course of translating and adapting this textbook, I received substantive support. In particular, I am grateful towards the former employees and doctoral students of the chair, as well as my current employees and doctoral students Ms. Isabell Falke (M.A.), Ms. Ines Kehl (M.Sc.), Mr. Pascal R. M. Kubin (LL. M.), Mr. Paul F. Langer (M.Sc.), Ms. Tirza F. Mueller (M.A.), Mr. Florian Schmidt (M.Sc.) and Mr. Jan C. Weyerer (M.Sc.) for their outstanding commitment and team spirit. The scientific development of a subject area thrives through the critical analysis and discussion of concepts and content. Given this fact and the currently inchoate state of knowledge regarding digital business, I am grateful for every comment or suggestion for improvement. Furthermore, lecturers who are interested in using graphics and lecture with materials from this textbook are welcome to contact the author. Speyer, Germany March 2021

Prof. Dr. Bernd W. Wirtz

v

Contents

Part I 1

2

Introduction

Foundations of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Basics of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of Information and Communication Applications Until 1956 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of Information and Communication Applications Until 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recent Developments of Information and Communication Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition and Classification of Digital Business . . . . . . . . . . . . 1.2 Actors, Interaction Patterns, and Service Exchange . . . . . . . . . . Different Interaction Patterns in Digital Business . . . . . . . . . . . Stages of Digital Business Development . . . . . . . . . . . . . . . . . Digital Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Activities of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Development of Digital User Structure . . . . . . . . . . . . . . . . . . . Digital User Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . Online Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital User Typology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Success Factors of Digital Business . . . . . . . . . . . . . . . . . . . . . Digital Innovation Capability . . . . . . . . . . . . . . . . . . . . . . . . . Strategic and Organizational Flexibility . . . . . . . . . . . . . . . . . . Capability for Networking and Integrating . . . . . . . . . . . . . . . . Ease of Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 10

14 16 18 18 20 21 23 26 26 27 27 29 30 30 31 31 32

Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Basics of Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . . . Relevance of Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure of Mobile Business . . . . . . . . . . . . . . . . . . . . . . Mobile Business Market and Its Market Leaders . . . . . . . . . . . . Definition and Classification of Mobile Business . . . . . . . . . . .

35 36 37 38 39 43

10 12

vii

viii

Contents

2.2

2.3

2.4 3

4

Applications and User Structure of Mobile Business . . . . . . . . . Mobile Applications and Mobile Software . . . . . . . . . . . . . . . . Mobile Browsing and Mobile Search . . . . . . . . . . . . . . . . . . . . Mobile Information, Mobile Entertainment, and Mobile Navigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mobile Commerce, Mobile Communication, and Mobile Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mobile Advertising and Mobile Telemetry . . . . . . . . . . . . . . . . Success Factors of Mobile Business . . . . . . . . . . . . . . . . . . . . . Customization and Mobile Networking . . . . . . . . . . . . . . . . . . Absence of Media Disruption and Seamless Connection . . . . . . Software Platform and Integration Degree . . . . . . . . . . . . . . . . Bandwidth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45 45 48 49 51 53 57 58 58 59 59 60

Social Media Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Basics of Social Media Business . . . . . . . . . . . . . . . . . . . . . . . Web 2.0 vs. Social Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Social Media and Social Media Business . . . . . . . Social Media Four-Factor Model . . . . . . . . . . . . . . . . . . . . . . . 3.2 Applications and User Groups in Social Media Business . . . . . . Social Media Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Media Microtargeting and Social Media Multiplier Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Media Convergence and Integration . . . . . . . . . . . . . . . . User Groups in Social Media Business . . . . . . . . . . . . . . . . . . . 3.3 Digital Disinformation on Social Media . . . . . . . . . . . . . . . . . . News Consumption on Social Media . . . . . . . . . . . . . . . . . . . . Integrated Model of Digital Disinformation . . . . . . . . . . . . . . . Governance of Digital Disinformation . . . . . . . . . . . . . . . . . . . 3.4 Success Factors in Social Media Business . . . . . . . . . . . . . . . . Appropriate Handling of Data Protection . . . . . . . . . . . . . . . . . Four-Factor Model and Social Media Success . . . . . . . . . . . . . . Business Potential of Various Social Media Tools . . . . . . . . . . 3.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

63 64 66 67 68 71 71 76 78 80 83 83 85 89 90 90 91 92 93

Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Basics of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Digital Government . . . . . . . . . . . . . . . . . . . . . . Actors of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . Advantages of Digital Government . . . . . . . . . . . . . . . . . . . . . Development of Digital Government . . . . . . . . . . . . . . . . . . . . Country Ranking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Open Government and E-Participation . . . . . . . . . . . . . . . . . . . Definition of Open Government . . . . . . . . . . . . . . . . . . . . . . . Open Government Framework . . . . . . . . . . . . . . . . . . . . . . . . . E-Participation and Digital Government . . . . . . . . . . . . . . . . . . Definition of E-Participation . . . . . . . . . . . . . . . . . . . . . . . . . .

95 96 96 98 100 101 103 104 105 106 108 109

Contents

4.3

4.4

4.5 Part II 5

6

ix

Services and User Structure of Digital Government . . . . . . . . . . Digital Government Services and User Structure . . . . . . . . . . . . Service Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Success Factors of Digital Government . . . . . . . . . . . . . . . . . . User-Centered Success Factors . . . . . . . . . . . . . . . . . . . . . . . . E-Service Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . IT Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

113 114 120 123 123 124 126 127

Technology, Digital Markets and Digital Business Models

Digital Business Technology and Regulation . . . . . . . . . . . . . . . . . . 5.1 Basics of Digital Business Technology . . . . . . . . . . . . . . . . . . Client-Server Interaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Web Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . World Wide Web Technologies . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Architectures . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Technology at the Human-Machine Interface . . . . . . . . . . . . . . Historical Development of the Human-Machine Interface Until 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recent Developments of the Human-Machine Interface . . . . . . . Human-Machine Interaction and Configuration . . . . . . . . . . . . . Success Factors of Human-Machine Interaction . . . . . . . . . . . . 5.3 Security in Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . Cybersecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Typical Threats in Computer Networks . . . . . . . . . . . . . . . . . . Cryptography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Blockchain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Digital Payment Systems and Applications . . . . . . . . . . . . . . . . Digital Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Payment Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Payment Success Factors . . . . . . . . . . . . . . . . . . . . . . . 5.5 Regulation of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . Formally Binding Content-Related Level of Internet Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory Aspects of Competition Law . . . . . . . . . . . . . . . . . Regulatory Aspects of Societal Law . . . . . . . . . . . . . . . . . . . . . Regulatory Aspects of Criminal and Civil Law . . . . . . . . . . . . . Organizational, Decision-Making, and Competence-Related Regulation Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

133 135 135 140 141 147 149

Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Basics of Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of IoT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IoT IT Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

189 190 191 192

149 157 159 162 163 164 165 168 171 173 174 178 179 181 182 183 183 184 185 186

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6.2

Applications of the Internet of Things . . . . . . . . . . . . . . . . . . . Factories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cities and Human . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail Environments and Worksites . . . . . . . . . . . . . . . . . . . . . Outside and Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home and Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Internet of Robotic Things: IoT, Robotics, and Industrial Automation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Opportunities and Challenges of Industry 4.0 for Business . . . . Stages of Industrial Automation . . . . . . . . . . . . . . . . . . . . . . . . IoT User Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Success Factors of IoT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IoT Key Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

197 199 199 200 201 202

7

Artificial Intelligence, Big Data, and Cloud Computing . . . . . . . . . 7.1 Artificial Intelligence Services and Applications . . . . . . . . . . . . Definition of Artificial Intelligence . . . . . . . . . . . . . . . . . . . . . Artificial Intelligence Framework . . . . . . . . . . . . . . . . . . . . . . . AI Applications and Use Cases . . . . . . . . . . . . . . . . . . . . . . . . Industry-Specific Effects of AI . . . . . . . . . . . . . . . . . . . . . . . . Opportunities and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Artificial Intelligence Governance . . . . . . . . . . . . . . . . . . . . . . Strategic Four AI Governance Model . . . . . . . . . . . . . . . . . . . . 7.2 Big Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relevance and Growth of Big Data . . . . . . . . . . . . . . . . . . . . . Applications and Uses of Big Data Analyses . . . . . . . . . . . . . . Big Data Architecture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Cloud Computing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Location Independency, Scalability, and Elasticity . . . . . . . . . . Security and Vendor Lock-In . . . . . . . . . . . . . . . . . . . . . . . . . Three Types of Cloud Service Models . . . . . . . . . . . . . . . . . . . 7.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

217 218 219 231 234 236 239 241 243 245 245 246 250 252 252 254 256 256

8

Digital Platforms, Sharing Economy, and Crowd Strategies . . . . . . 8.1 Basics of Platform Economics . . . . . . . . . . . . . . . . . . . . . . . . . Platform Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advantages of Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Platform Functionality and Strategies . . . . . . . . . . . . . . . . . . . . 8.2 Sharing Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareconomy and Sharing Strategies . . . . . . . . . . . . . . . . . . . . SSU Sharing Platform Model . . . . . . . . . . . . . . . . . . . . . . . . . Applications of the Shareconomy . . . . . . . . . . . . . . . . . . . . . .

259 260 260 262 268 269 269 271 273

6.3

6.4

6.5 6.6

204 204 205 207 208 210 212 213 214

Contents

8.3

Crowd Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Crowdfunding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Crowd Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

275 275 278 278 279

Digital Ecosystem, Disintermediation, and Disruption . . . . . . . . . . 9.1 Digital Ecosystem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Digital Ecosystem . . . . . . . . . . . . . . . . . . . . . . . . Digital Ecosystem Structure: Organizational Models . . . . . . . . . Procurement and Procurement Interactions . . . . . . . . . . . . . . . . Knowledge Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Value Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Value Capture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision Interactions and Customers . . . . . . . . . . . . . . . . . . . . Digital Ecosystem Technical Infrastructure: Operational Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Digital Disintermediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Role of Trade in the Value Chain . . . . . . . . . . . . . . . . . . . The Internet and Its Potential for Disintermediation . . . . . . . . . Opportunities and Risks of Disintermediation . . . . . . . . . . . . . . Disintermediation Case Study: HelloFresh . . . . . . . . . . . . . . . . 9.3 Digital Disruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Structure of the Five-Level Model of Digital Disruption . . . The Role of the Disruptor . . . . . . . . . . . . . . . . . . . . . . . . . . . . Entrepreneurial Strategies for Digital Disruption . . . . . . . . . . . . Digital Disruption Case Study: Netflix . . . . . . . . . . . . . . . . . . . 9.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

283 284 284 288 289 289 289 290 290 290 291 292 292 293 295 296 297 299 299 303 307 308

Digital B2C Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Basics of Digital Business Models . . . . . . . . . . . . . . . . . . . . . . Partial Models of the Integrated Digital Business Model . . . . . . Classification of B2C Digital Business Models . . . . . . . . . . . . . 10.2 Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Content Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . Content Core Assets and Core Competencies . . . . . . . . . . . . . . E-Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Infotainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Commerce Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . Commerce Core Assets and Core Competencies . . . . . . . . . . . . E-Attraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

311 313 315 323 324 326 329 332 334 336 336 338 339 342 345

8.4 9

10

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E-Bargaining/E-Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . E-Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Tailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Context Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . Context Core Assets and Core Competencies . . . . . . . . . . . . . . E-Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Catalogs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Connection Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . Connection Core Assets and Core Competencies . . . . . . . . . . . Intra-Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inter-Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hybrid Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drivers for Developing Hybrid Business Models . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

346 348 349 350 352 357 360 361 362 364 367 369 371 373 373 376

Digital B2B Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Digital B2B Sourcing Business Model . . . . . . . . . . . . . . . . . . . Subcategories of the Service Offering . . . . . . . . . . . . . . . . . . . Development of an Aggregated Value Chain . . . . . . . . . . . . . . Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . 11.2 Digital B2B Sales Business Model . . . . . . . . . . . . . . . . . . . . . Subcategories of the Service Offering . . . . . . . . . . . . . . . . . . . Development of an Aggregated Value Chain . . . . . . . . . . . . . . Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . 11.3 Digital B2B Supportive Collaboration Business Model . . . . . . . Subcategories of the Service Offering . . . . . . . . . . . . . . . . . . . Development of an Aggregated Value Chain . . . . . . . . . . . . . . Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . 11.4 Digital B2B Service Broker Business Model . . . . . . . . . . . . . . Subcategories of the Service Offering . . . . . . . . . . . . . . . . . . . Development of an Aggregated Value Chain . . . . . . . . . . . . . . Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . 11.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

379 381 382 383 383 384 385 386 387 388 389 389 390 391 392 393 393 394

10.4

10.5

10.6 10.7 11

Part III 12

Digital Strategy, Digital Organization and E-commerce

Digital Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 Four Forces of Digital Strategy . . . . . . . . . . . . . . . . . . . . . . . . Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Product and Service Convergence . . . . . . . . . . . . . . . . . . . . . . Business Unit Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . Company Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sector Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . .

399 401 403 405 405 406 406 407

Contents

Deregulation of Information, Media, and Communications Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Modifications of User Preferences . . . . . . . . . . . . . . . . . . . . . . Convergence in Broadband Internet . . . . . . . . . . . . . . . . . . . . . Digitization and Innovation Dynamics . . . . . . . . . . . . . . . . . . . Increase in the Speed of Innovation and Open Innovation . . . . . Open Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in the Level of Digitization . . . . . . . . . . . . . . . . . . . . Individualization of Service Offers . . . . . . . . . . . . . . . . . . . . . Free Delivery via Digital Networks . . . . . . . . . . . . . . . . . . . . . Market Complexity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in Market Transparency . . . . . . . . . . . . . . . . . . . . . . . Fragmentation of Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reduction of Market Entry Barriers . . . . . . . . . . . . . . . . . . . . . Customer Empowerment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reduction of Switching Barriers . . . . . . . . . . . . . . . . . . . . . . . Increase of Market Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Value Activity System . . . . . . . . . . . . . . . . . . Digital Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITS Front-Office Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . PSP Back-Office Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategy Development in Digital Business . . . . . . . . . . . . . . . . Taxonomy of Digital Business Strategy Development . . . . . . . . Digital Business Target Plan . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Situational Analysis . . . . . . . . . . . . . . . . . . . . Digital Business Strategy Formulation . . . . . . . . . . . . . . . . . . . Digital Business Strategy Implementation . . . . . . . . . . . . . . . . Digital Business Strategy Audit . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

408 408 409 409 410 413 416 418 418 419 419 422 423 426 427 428 431 431 434 436 437 441 442 447 452 463 466 467

Digital Transformation and Digital Organization . . . . . . . . . . . . . . 13.1 Digital Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Digital Transformation . . . . . . . . . . . . . . . . . . . . Phases of Digital Development and Transformation . . . . . . . . . 13.2 Digital Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Digital Leadership . . . . . . . . . . . . . . . . . . . . . . . Traditional Leadership Versus Digital Leadership . . . . . . . . . . . 13.3 Digital Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Digital Organization . . . . . . . . . . . . . . . . . . . . . Development Stages of the Digital Organization . . . . . . . . . . . . 13.4 Digital Teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Digital Teams . . . . . . . . . . . . . . . . . . . . . . . . . . Development Stages of Digital Teams . . . . . . . . . . . . . . . . . . . 13.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

471 473 473 475 477 477 478 480 480 481 487 487 489 491

12.2

12.3

12.4 13

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14

Digital Marketing and Electronic Commerce . . . . . . . . . . . . . . . . . 14.1 Digital Marketing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Aspects of Digital Marketing . . . . . . . . . . . . . . . . . . . . . . Customer Model of Determinants of Customer Value . . . . . . . . Market Segmentation Criteria . . . . . . . . . . . . . . . . . . . . . . . . . Design of the Digital Marketing Strategy . . . . . . . . . . . . . . . . . 14.2 Digital Marketing Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price Differentiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-linear Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price Bundling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dynamic Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Products/Digital Services . . . . . . . . . . . . . . . . . . . . . . . Product Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Product Variation and Product Differentiation . . . . . . . . . . . . . Product Elimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communication via Digital Channels . . . . . . . . . . . . . . . . . . . . Communication Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . Targeting in Digital Communication . . . . . . . . . . . . . . . . . . . . Digital Communication Instrument Influencer Marketing . . . . . . Further Instruments of Digital Communication . . . . . . . . . . . . . Digital Branding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brand Management Strategies in Digital Branding . . . . . . . . . . 14.3 Online/Offline Multichannel Marketing . . . . . . . . . . . . . . . . . . Service-Channel Diversification Model . . . . . . . . . . . . . . . . . . Digital Business Multichannel Strategy Framework . . . . . . . . . Design Multichannel Strategy and System . . . . . . . . . . . . . . . . 14.4 CRM in Digital Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Digital Customer Relationship Management . . . . . Customer Loyalty Dimensions in Digital CRM . . . . . . . . . . . . . Customer Relationship Process in Digital CRM . . . . . . . . . . . . Instruments of Digital CRM . . . . . . . . . . . . . . . . . . . . . . . . . . 14.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

495 497 497 501 504 508 513 513 520 521 522 522 523 524 528 531 535 536 540 542 544 549 553 554 555 558 558 561 564 566 567 568 569 572 578

15

Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1 Basics of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . Relevance of Digital Procurement . . . . . . . . . . . . . . . . . . . . . Classification of Digital Procurement . . . . . . . . . . . . . . . . . . . Definition of Digital Procurement . . . . . . . . . . . . . . . . . . . . . Suitability of Digital Procurement . . . . . . . . . . . . . . . . . . . . . 15.2 Structural Framework of Digital Procurement . . . . . . . . . . . . . Typology of Procurement Goods . . . . . . . . . . . . . . . . . . . . . . ABC Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Classification of the Procurement Market . . . . . . . . . . . . . . . .

581 583 584 585 588 590 592 592 593 594

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Process of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . Digital Procurement Analysis Phase . . . . . . . . . . . . . . . . . . . . . Digital Procurement Initiation Phase . . . . . . . . . . . . . . . . . . . . Digital Procurement Agreement Phase . . . . . . . . . . . . . . . . . . . Digital Procurement Processing and Clearing Phase . . . . . . . . . Actors Involved in Digital Procurement . . . . . . . . . . . . . . . . . . Forms of Interaction in Digital Procurement . . . . . . . . . . . . . . . One-to-One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-to-Many: Sell-Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-to-Many: Buy-Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Many-to-One-to-Many: Buy-Side . . . . . . . . . . . . . . . . . . . . . . Punch-Out Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potentials of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . Time-Saving Potentials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Further Advantages of Digital Procurement . . . . . . . . . . . . . . . Digital Procurement via Digital Marketplaces . . . . . . . . . . . . . . Evaluation of Digital Marketplaces . . . . . . . . . . . . . . . . . . . . . Digital Procurement Implementation . . . . . . . . . . . . . . . . . . . . Analysis Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business and Product Analysis . . . . . . . . . . . . . . . . . . . . . . . . Process and Supplier Analysis . . . . . . . . . . . . . . . . . . . . . . . . . Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

596 597 599 600 602 605 605 607 607 608 608 612 613 613 614 616 618 619 621 622 622 624 625

Digital Business Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1 Pre-implementation Analysis Phase . . . . . . . . . . . . . . . . . . . . . Step 1: SWOT Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 2: Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 3: Customer Demand and Preferences . . . . . . . . . . . . . . . . Step 4: Digital Business Strategy Concept . . . . . . . . . . . . . . . . 16.2 Implementation Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 5: Definition of Digital Business Implementation Model Master Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 6: Digital Business Implementation Model Option Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 7: Digital Business Implementation Model Design/ Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 8: Digital Business Implementation Model Pilot Testing and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 9: Digital Business Implementation Model Deployment . . . Step 10: Digital Business Implementation Model Monitoring and Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Targets of Digital Business Implementation . . . . . . . . . . . . . . . 16.3 Digital Business 3+3 Audit and Evaluation System . . . . . . . . . . Assessment Areas: Design, Process, and Outcome . . . . . . . . . . Assessment Levels: Company, Digital Business Offer, and Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

629 630 631 632 632 632 632

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634 634 635 636 636 637 639 641 641 643 644

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Part IV

Digital Case Studies

17

Google/Alphabet Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1 Google’s Organizational History and Development . . . . . . . . . . Idea and First Steps of Google 1998 . . . . . . . . . . . . . . . . . . . . Extension by Various Services . . . . . . . . . . . . . . . . . . . . . . . . Development of Revenue and Net Profit . . . . . . . . . . . . . . . . . 17.2 Google’s Integrated Business Model . . . . . . . . . . . . . . . . . . . . Google as an Internet Gatekeeper . . . . . . . . . . . . . . . . . . . . . . Core Competencies and Resources of Google . . . . . . . . . . . . . . Google’s Business Model Development in a Temporal Context . . Development of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.3 Google’s Market Environment . . . . . . . . . . . . . . . . . . . . . . . . . Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.4 Case Analyses and Structure of Solutions . . . . . . . . . . . . . . . . . Characteristics of Case Studies . . . . . . . . . . . . . . . . . . . . . . . . Analysis of Actual Situation and SWOT Analysis . . . . . . . . . . . Specification of Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduction of Strategic Courses of Action . . . . . . . . . . . . . . . . . Determination of Crucial Success Factors . . . . . . . . . . . . . . . . . Decision on Strategic Alternatives . . . . . . . . . . . . . . . . . . . . . . Deduction of Recommendations . . . . . . . . . . . . . . . . . . . . . . . 17.5 Google Case: Questions and Solutions . . . . . . . . . . . . . . . . . . . Questions, Key Aspects, and Hints for Solution . . . . . . . . . . . . Solution to Question 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solution to Question 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solution to Question 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solution to Question 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

649 650 650 651 652 653 653 655 656 662 663 663 665 665 665 668 668 669 669 669 670 670 670 672 674 676 676

18

Selected Digital Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 Digital Business Model Cases . . . . . . . . . . . . . . . . . . . . . . . . . Wikipedia Case Study: Content . . . . . . . . . . . . . . . . . . . . . . . . eBay Case Study: Commerce . . . . . . . . . . . . . . . . . . . . . . . . . Bing Case Study: Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . LinkedIn Case Study: Connection . . . . . . . . . . . . . . . . . . . . . . 18.2 E-Commerce Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . eBay Case Study: Digital Pricing . . . . . . . . . . . . . . . . . . . . . . . Spreadshirt Case Study: Digital Products and Digital Services . . Yahoo Case Study: Digital Communication . . . . . . . . . . . . . . . Amazon Case Study: Digital Customer Relationship Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UBS Case Study: Digital Procurement . . . . . . . . . . . . . . . . . . .

681 682 682 687 691 696 700 701 702 704

The Digital Future: A Brief Outlook . . . . . . . . . . . . . . . . . . . . . . . .

717

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

721

19

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About the Author

Prof. Dr. Bernd W. Wirtz studied business administration in Cologne, London and Dortmund, culminating in an MBA (Master of Business Administration). He later served as a lecturer in media management at the Universities of Düsseldorf (Germany) and Zurich (Switzerland). In 1994, he was awarded a doctorate in the field of new media and competition strategies (Doctorate in Business Administration). After finishing his studies, Prof. Wirtz worked as a consultant with Roland Berger & Partners as well as Andersen Consulting/Accenture (Manager in the field of new media/electronic commerce) and as a Lecturer at the University of Zurich. From 1999 to 2004, he was a Full Professor (Deutsche Bank Chair for Strategic Management) at the University of Witten/Herdecke (Germany). Since 2004, he has been a Full Professor (Chair for Information and Communication Management) at the German University of Administrative Sciences Speyer (Germany). Prof. Wirtz is an editorial board member of the journal Long Range Planning, the Journal of Media Business Studies, the International Journal on Media Management, the International Journal of Business Environment, the International Journal of Public Administration, the Public Organization Review and the International Review on Public and Nonprofit Marketing. He has several years of experience in consulting on strategy projects for leading media and telecommunication enterprises and the European Commission. His publications focus on media and Internet management, business model management, marketing, electronic business and e-government (approximately 300 publications). In total, Prof. Wirtz has published 20 books (e.g. tenth edition of Media and Internet xvii

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Management in German, seventh edition of Electronic Business in German, fourth edition of Direct Marketing in German, fifth edition of Business Model Management in German and fourth edition of Mergers & Acquisitions Management in German).

Part I Introduction

1

Foundations of Digital Business

Contents 1.1 Basics of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of Information and Communication Applications Until 1956 . . . . . . . Development of Information and Communication Applications Until 1994 . . . . . . . Recent Developments of Information and Communication Applications . . . . . . . . . . Definition and Classification of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Actors, Interaction Patterns, and Service Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Different Interaction Patterns in Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stages of Digital Business Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Activities of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Development of Digital User Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital User Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Online Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital User Typology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Success Factors of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Innovation Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategic and Organizational Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capability for Networking and Integrating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ease of Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 10 12 14 16 18 18 20 21 23 26 26 27 27 29 30 30 31 31 32

Learning Objectives By working through this chapter, you will be able to: 1. Define and understand digital business and describe the interaction patterns and service exchange among the various actors. 2. Describe and discuss the stages of digital business development. 3. Analyze the user structure of digital business and typical Internet user characteristics. 4. Describe the activities that are associated with digital business. 5. Identify general success factors of digital business. # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_1

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For some time, there has been an essential change within the economy and society induced by information technology. This change is mainly caused by increasing digitization: “With the beginning of the ‘digital age’, also called ‘digital revolution’, which evolved throughout the development of the multimedia market, there will be a fundamental change of existing structures in the telecommunication, computing, entertainment and media industries” (Denger and Wirtz 1995b). This assessment in 1995 aptly illustrates the impact of digitization.1 Network Internet applications represent a sustainable simplification and individualization of communication and information brokerage. Already in the year 1970, the Harvard sociologist Daniel Bell has shaped the term “postindustrial society” describing the, at that time, anticipated change due to technology. In this society, the secondary sector in the economy loses importance because of an economic system that is primary rather shaped by information technologies than by production. Already in the beginning of the 1980s, Bell’s academic and abstract phrasing has been specified by using the term “information society.” The sociological term describes the transfer of human labor and macroeconomic impact to the tertiary sector of a higher industrialized society. The delineated change is particularly characterized by technological development dynamics. The underlying principles of this development can be explained by Kondratieff’s theory of long cycles showed in Fig. 1.1. Industrialized Society

Information Society

• Steam engine

• Railway

• Chemical industry

• Petrochemistry

• Cotton

• Steel

• Electrical engineering

• Automobile industry

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See for the following chapter also Wirtz (2020b).

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Fig. 1.1 Kondratieff cycle. Source: Nefiodow and Nefiodow (2014)

• Information technology

?

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2000-2005

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Foundations of Digital Business

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According to Kondratieff, technological innovations essentially determine the status of societal development through sinusoidal innovation phases (Schumpeter 1939). Innovations such as the steam engine open up new economic opportunities which are reflected in an increase in investment. As soon as the innovation has established itself in society and industry, the associated investments decrease considerably. At this stage, however, pioneers are already developing the next technological advance (e.g., railways) for a further investment boost. This change, currently induced by the dynamics of the development of information and communication technology, is an important driver of the evolution toward an information society. In the course of the societal change from the postmodern industrial society to the information society, the quantity and quality of information enter entirely new dimensions. Information has never been available that extensive and at the same time concentrated before. Particularly the Internet is the focal point in this context, enabling time- and location-independent as well as accurate access to a previously unimagined extent of knowledge. In the postmodern industrial society, knowledge was available solely dispersed. Through the dynamic development of information and communication technologies, access to information has become inexpensive or even free of charge. The ubiquity of information and knowledge has become the main identifying characteristic of the information society. Figure 1.2 illustrates this multidimensional phenomenon.

Digital Collaboration Digital Communication Electronic Commerce

Digital Business

Internet Economy

Digital Information/ Entertainment Digital Education

Fig. 1.2 Dimensions of the information society. Source: Wirtz (2000c, 2020b)

Information Society

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In this context, the Internet economy and digital business represent the two main dimensions that constitute today’s information society. Digital business includes electronic commerce, digital communication, digital information/entertainment, digital collaboration, and digital education. This shows that sociopolitical, economic, and managerial areas are increasingly affected by the information society. The Internet economy strongly changes existing structures and interdependencies through the rapid diffusion of information and communication technologies (Webster 2014). Relevance of Digital Business The rapid development of new Internet hosts and the growing Internet usage reflect the continuously increasing importance of information and communication technologies for the information society. The influence of the Internet as a global networking and communication system is ubiquitous. Its rapid spread on a worldwide level connecting state, economy, society, and individuals also across national borders made it an unprecedented medium. Figure 1.3 illustrates the development of worldwide Internet hosts, namely, domain names that are assigned to an IP address. 1200

Million hosts advertised in the DNS

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Fig. 1.3 Development of the number of Internet hosts since 1993. Data source: ISC (2019)

Along with the rising number of Internet hosts, the Internet usage increases steadily among the populations around the world. At the end of 2019, the Internet already had more than 4.5 billion users. This means that almost six out of ten people worldwide use the Internet, representing a growth of 1167% since the year 2000 (Internet World Stats 2020). The respective development and diffusion of modern information and communication technologies, as well as the respective repositioning and use of these technologies, were key drivers of the shift from an

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Foundations of Digital Business

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industrial to an information society. Figure 1.4 reflects this development by showing recent worldwide Internet usage and population statistics. While the Internet penetration rate is particularly high in North America (94.6%) and Europe (87.2%), Africa and Asia are subject to digital divide with comparatively low penetration rates of 39.3% and 53.6%, respectively. In Latin America, the Middle East, and Australia, about two out of three people use the Internet (Internet World Stats 2020). In view of the above-mentioned developments, digital business and the information society have significantly gained importance. The following section presents the basics of digital business. User in Million 5000 4500

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Fig. 1.4 Worldwide Internet usage and population statistics. Data source: Internet World Stats (2020)

Structure of the Textbook This textbook intends to contribute to the topic of digital business from the perspective of business administration and is therefore divided into four parts: Part I contains the first four chapters and provides an introduction to the most important and relevant areas of digital business. Chapter 1 gives an overview of the field of digital business by presenting the foundations of digital business involving basics, actors, interaction patterns and service exchange, the development of digital user structure, as well as success factors of digital business. Based on this, Chapter 2 observes mobile business and Chapter 3 social media business. Both chapters first describe the basics before they discuss applications, the user structure, as well as respective success factors. Chapter 3 (social media business) additionally refers to the increasingly important phenomenon of digital disinformation. Chapter 4 addresses the

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concept of digital government by explaining its basics, open government and e-participation, digital governmental services and user structure, as well as key success factors of digital government. Part II refers to the underlying technology, digital markets, as well as digital business models and covers Chapters 5–11. Chapter 5 deals with digital business technology and regulation by explaining the basics of digital business technology, the use of technology at the human-machine interface, security in digital business, digital payment systems and applications, as well as regulatory issues with regard to digital business. Chapter 6 examines the topic of Internet of Things (IoT) by presenting the basic functioning and underlying technologies, the Internet of robotic things, and its applications, user structure, and success factors. Drawing upon this, Chapter 7 deals with artificial intelligence (AI), cloud computing, and big data. This section explicitly addresses AI services and applications, AI governance, big data, as well as cloud computing services. Chapter 8 examines digital platforms, the sharing economy, and crowd strategies by presenting the magnitude of these digitally initiated cooperation models. Chapter 9 refers to digital ecosystems, disintermediation, and disruption. Chapters 10 and 11 deal with digital business models, explaining the digital business model concept and illuminating digital business models in the field of B2C (business-to-customer) and B2B (business-to-business). Chapter 10 refers to digital B2C business models and can be divided into content, commerce, context, connection, and B2C hybrid digital business models. Finally, Chapter 11 addresses sourcing, sales, supportive collaboration, and the role of service brokers in terms of digital B2B business models. Part III deals with digital strategy, digital organization, and e-commerce covering Chapters 12–16. Chapter 12 addresses digital business strategy, presenting the four forces of digital strategy, the digital business value activity system, as well as strategy development in digital business. Chapter 13 investigates the digital transformation as a macro-oriented phenomenon and explains digital leadership and digital teams as two disruptive implications on the organizational level. Chapter 14 covers the topic of digital marketing and electronic commerce, providing insights into digital marketing strategy, the digital marketing mix, online/offline multichannel marketing, e-commerce platforms, social commerce, as well as CRM with regard to digital marketing. Chapter 15 examines digital procurement by presenting a structural framework, the potentials, as well as the implementation of digital procurement. Chapter 16 provides an outline of digital business implementation by explaining the digital business roadmap, the importance of testing, the improvement and rollout, the controlling of digital business, as well as the digital business 3 + 3 audit and evaluation system. Part IV mainly discusses digital case studies. In this regard, Chapter 17 describes the example of Google/Alphabet, explaining Google’s organizational history, its integrated business model, and its market environment. The chapter concludes with summarizing questions and respective solutions with regard to the case study. Chapter 18 contains additional case studies that can be divided into digital business models or digital e-commerce. Chapter 19 provides a brief outlook of digital future challenges. Figure 1.5 visualizes the structure of the textbook.

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Part III: Digital Strategy, Digital Organization and E-Commerce

Foundations of Digital Business

4. Digital Government

16. Digital Business Implementation

15. Digital Procurement

14. Digital Marketing and Electronic Commerce

Part IV: Digital Case Studies

9. Digital Ecosystem, Disintermediation, and Disruption

19. The Digital Future

10. B2C Digital Business Models

18. Selected Digital Case Studies

11. B2B Digital Business Models

17. Google/Alphabet Case Study

3. Social Media Business

12. Digital Business Strategy

8. Digital Platforms, Sharing Economy and Crowd Strategies

7. Artificial Intelligence, Big Data and Cloud Computing

5. Digital Business Technology and Regulation

Fig. 1.5 Structure of the textbook

6. Internet of Things

Part II: Technology, Digital Markets and Digital Business Models

2. Mobile Business

1. Foundations of Digital Business

13. Digital Transformation and Digital Organization

Part l: Introduction

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Basics of Digital Business

Digital business is one of the most significant fields of application of the new digital information and communication technologies (Schneider 2015). Before addressing the specific segments of digital business in detail, the following section systematically describes the basics of digital business. In doing so, it first illuminates the historical development of information and communication applications and then defines and classifies the term digital business. On this basis, the following deliberations address the actors, interaction patterns, and service exchange in the field of digital business.

Development of Information and Communication Applications Until 1956 The development of information and communication applications looks back on a long history (see for the following Wirtz 2018b, 2020c). The basic preconditions for today’s information and communication applications have been created back in ancient times and the Middle Ages. About 250 B.C., the first algorithm to determine prime numbers was introduced, known as “sieve of Eratosthenes.” This algorithm defines a rule that consists of a finite number of steps and serves to solve problems. Algorithms represent the theoretical foundation of calculation by means of a computer. In 1623, the astronomer and mathematician Wilhelm Schickard invents the first four-function calculator for the addition and subtraction of numbers. Approximately 50 years later, in the year 1672, Gottfried Leibniz creates the first mechanical calculating machine that is capable of the four standard calculation methods. In the year 1854, George Boole publishes the “Boolean algebra” for the portrayal of logical operators and set theory, which form the theoretical foundation of electronic technology. In the course of developing technological communication infrastructures, Alexander Graham Bell puts the first telephone into operation in the year 1854 based on the fundamental research of Philipp Reis. After a patent for wireless energy transfer, Nikola Tesla patents electrical circuits in the year 1903. These achievements laid the groundwork for radio technology and thus the wireless transmission of signals via electromagnetic waves. Thirty-three years later, a decisive starting point for the theoretical informatics has been set. With the Turing machine, Alan M. Turing develops a model for calculating functions for the solution of different decision problems. In 1941, the construction engineer Konrad Ernst Otto Zuse builds the first fully automated, program-controlled, and freely programmable computer in the world, which primarily served for processing numbers. Only a few years later, in the year 1946, the first mobile network worldwide goes into operation in the United States as an extension of radio technology. The increasing digitization of information and communication technologies is characterized by the further support of new communication tools and improved information transmission. In the year 1948, William Bradford Shockley patents the transistor that serves for switching and amplifying electrical signals. In the year 1953, color television is introduced in the United States, and in the year 1956, IBM introduces the magnetic hard drive (IBM 350) for storing data. This technical improvement not only enabled a quicker access time and greater storage capacity but also laid the foundation for secure data storage. Figure 1.6 illustrates the development of information and communication applications until 1956.

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Implementation of the first mobile network worldwide in the U.S.

IBM introduces the magnetic hard drive (IBM 350)

1953 1956

Introduction of color television in the U.S.

Fig. 1.6 Development of information and communication applications (250 B.C. until 1956). Source: Wirtz (2013b, 2020b) and updates

Wilhelm Schickard constructs the first 4function calculator

250 B.C.

Gottfried Leibnitz Alexander With the Turing machine, Eratosthenes constructs the first Graham Bell puts Alan M. Turing develops a develops an mechanical calculating the first basic foundation of algorithm for machine that is capable telephone into theoretical informatics determining prime of the four standard operation numbers calculation methods

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1.1 Basics of Digital Business 11

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Development of Information and Communication Applications Until 1994 The Disk Operating System/360 (DOS) introduced in 1966 has been provided as operating system for IBM mainframes. Therefore, the potential of the magnetic hard drive IBM 350 could be fully exploited for the first time. DOS facilitated a quasiparallel diffusion of computer operations based on the directly addressable magnetic disc storage media. As a precursor of today’s Internet, Paul Baran and Donald Watts Davies create the cross-linked decentral network ARPANET in the year 1969. In the year 1971, Intel launches the first microprocessor 4004 that is produced in series for the first time. Ten years later, in the year 1981, IBM introduces the first personal computer and opens up new possibilities for developing information and communication applications. In 1983, Motorola introduces the world’s first commercial mobile phone DynaTAC 8000x. Soon after, Microsoft releases Windows 1.0 for a simplified use of different devices. In the year 1985, Steve Case founds the online service Quantum Computer Services, which is renamed to AOL three years later. With the establishment of the World Wide Web in 1989, the Internet increasingly influences the media and initiates a trend towards digital technologies that persist until today. An advancement of the enterprise software became necessary, leading SAP to offer its ERP software SAP R/3. Since that time, companies are able to connect different business areas by means of this software. In the same year, Toshiba introduces the first tablet PC Dynapad T100X. In the year 1994, Jeff Bezos founds the Internet shopping platform Amazon revolutionizing the global online trade in goods. One year after the introduction of Amazon, Pierre Omidyar founds the Internet auction house eBay Inc., which quickly becomes the world’s largest online marketplace for private and commercial distributors. At this point, information and communication applications may be subsumed under a generic term for a variety of services in the fields of electronics, electrical engineering, information technology, and informatics. These fields are frequently characterized by a digitization of their components and the possibility of interactive use (Wirtz 1995b). Figure 1.7 depicts the development of information and communication applications from 1966 to 1994.

1969

1971

Intel launches the first microprocessor 4004

Introduction of IBM „Personal Computer“

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1983

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Microsoft releases Windows 1.0

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Steve Case founds the Internet service Quantum Computer Services (renamed to AOL 3 years later)

Aol.

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amazon.com

Jeff Bezos founds the internet mail order business Amazon

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SAP releases the ERP-Software SAP R/3

SAP

Fig. 1.7 Development of information and communication applications (1966 until 1994). Source: Wirtz (2013b, 2020b) and updates

Paul Baran und Donald Watts Davies create the first decentral network ARPANET

1966

Disk Operating System/360 (DOS) is introduced as operating system for IBM mainframes

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Recent Developments of Information and Communication Applications The information society is in a dynamic stage of development, which places high demands on the operating companies with regard to their innovative power and flexibility. An important trend regarding the development of information and communication technologies begins with the introduction of the first smartphone, developed and distributed by Nokia in 1996. While at the beginning of the smartphone era the phones were rarely dispersed, they are now a mobile companion and very important for everyday life. In the year 1998, Lawrence Edward Page and Sergey Brin found the Internet service provider Google Inc. and offer a far-reaching search engine with the same name. In 1999, AT&T starts to market broadband in the United States and thus enables high data transmission rates. The company launches its service including digital subscriber line (DSL), cable modem, and wireless Internet access for corporate customers. Since the end of the 1990s, the information society has significantly gained in importance, particularly due to the development of the Internet economy. Therefore, changes in the competitive marketplace and economic conditions resulted in numerous foundations of dotcom companies since the year 1998. This trend has been supported by the further development of mobile networks and the ubiquitous diffusion of the Internet. For instance, the implementation of the first UMTS network at the Isle of Man by the local company Manx Telecom in 2001 is an essential milestone for the mobile information and communication technologies. This development increasingly facilities new Internet services. For example, the Internet has emerged as a further distribution channel for the music industry. In this context, Apple’s introduction of iTunes in the year 2001 represents an important cornerstone. In the year 2004, Mark Zuckerberg founds the social network Facebook. The boom of the Web 2.0 and social media applications continues in the year 2005. Internet platforms like Facebook and Twitter reflect the emerging network growth of the Internet. Today, social media has become an integral part of the information society. In the year 2006, AT&T launch their brand U-verse, offering triple-play telecommunications services in 21 states of the United States and using the FTTP, VDSL, and ADSL communication protocols. Already in the year 2009, the Swedish company TeliaSonera puts the first commercial LTE network in Stockholm and Oslo into operation. In 2016, Oculus VR launches its virtual reality headset for customers. In addition, 5G broadband Internet partially already accessible in the United States in 2018, is offered on a broad scale in 2019. Here, the number of users is assumed to reach 1.5 billion by the year 2024 (Fisher 2019). Figure 1.8 shows the development of information and communication applications from 1995 until 2019.

1996

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Lawrence Edward Page und Sergei Brin found the Internet service provider Google Inc.

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AT&T launches Uverse using the FTTP, VDSL, and ADSL communication protocols

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2019 2019

Launch of 5G wireless networks

Oculus VR launches first VR glasses for customers

2016

Implementation of the first commercial LTE-network of TeliaSonera in Stockholm and Oslo

TeliaSonera

Fig. 1.8 Development of information and communication applications (1995 until 2019). Source: Wirtz (2013b, 2020b) and updates

iTunes

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Marc Zuckerberg founds the social network Facebook

Apple introduces the first version of iTunes software

2001

Manx Telecom implements one of the first UMTS networks at the Isle of Man

manx telecom

Nokia develops Introduction of DSL, and distributes the cable modem, and first smartphone wireless internet access in the U.S.

1995

Pierre Omidyar founds the Internet auction site eBay

e bay

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Definition and Classification of Digital Business In the context of the Internet economy, there are various terms and definitions. In general, the current literature has a heterogeneous understanding of the term digital business. Although there is no uniform terminological treatment, there is a trend to use the terms digital business, e-business, and e-commerce synonymously. In addition, the existing definitions frequently overlap to some extent, which is exemplary for the terminological inconsistency of the term’s application. Table 1.1 presents some important definitions of digital business. Table 1.1 Selected definitions of digital business Author(s) IBM (1997)

PricewaterhouseCoopers (1999) Wirtz (2000e)

Rayport and Jaworski (2001)

Jelassi and Enders (2005) Chen (2005)

Papazoglou and Ribbers (2006) Chaffey (2009)

Laudon and Traver (2014) Schneider (2017)

Source: Wirtz (2020b)

Definition A secure, flexible, and integrated approach to delivering differentiated business value by combining the systems and processes that run core business operations with the simplicity and reach made possible by Internet technology. Hereafter, e-business will be defined as the application of information technologies to facilitate buying and selling of products, services, and information over public standard-based networks. Digital business [...] is defined as the initiation, negotiation, and/or transaction of a business between economic subjects which is electronically realized through telecommunication networks. E-business can be formally defined as technology-mediated exchanges between parties (individuals, organizations, or both) as well as the electronically based intra- or interorganizational activities that facilitates such exchange. The use of electronic means to conduct an organization’s business internally and/or externally. Business that is conducted using electronic networks or electronic media, sometimes used synonymously with e-commerce and sometimes used more widely to include other business activities in addition to buying and selling. E-business can be defined as the conduct of automated business transactions by means of electronic communications networks (e.g., via the Internet and/or possibly private networks) end-to-end. All electronically mediated information exchanges, both within an organization and with external stakeholders supporting the range of business processes. [...] is the use of Internet, the World Wide Web (Web), and mobile apps to transact business. The term electronic commerce (or e-commerce) [...] includes all business activities that use Internet technologies. Internet technologies include the Internet, the World Wide Web, and other technologies such as wireless transmissions on mobile telephone networks.

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To systematically deduce a definition of the term digital business, it is necessary to subdivide these definitions into subject-related, functional, and teleological aspects. While subject-related aspects deal with the subject and structure of the respective content of the term, functional aspects refer to its effectiveness and teleological aspects to its aim and purpose. In the context of subject-related definitions, the consistency of some characteristics is predominant. Most definitions consider the creation of business processes and transactions as the focus of digital business. Several definitions refer to the usage of innovative information technologies. For instance, IBM (1997) used the term of “Internet technology” in their original definition of digital business, which has been unified to “information technology” or “information and communication technology” in several subsequent definitions. In addition, the expressions “use of electronic means” and “by means of electronic communication networks” have been used synonymously for electronic information technology (Jelassi and Enders 2005). In general, there is a clear consensus with regard to the creation of business processes and transactions through the usage of innovative information technology (Zhu and Kraemer 2005). The latest subject-related definitions involve the application of digital business via emerging technologies, such as wireless transmissions on mobile telephone networks and applications. In contrast, when looking at the functional aspects, there is a lack of clarity regarding the extent and the intensity of certain aspects. For instance, some definitions restrict the number of actors involved by constraining digital business to the interorganizational business domain. This results in a narrow comprehension of the term. Other definitions expand the circle of actors by including intraorganizational and customer-related perspectives. Furthermore, there is no clear consensus regarding the extent of business processes in digital business. The spectrum of definitions ranges from solely supporting activities via electronic networks to electronic implementation and execution of all business activities. Regarding the teleological aspects, the definitions show a certain heterogeneity. PricewaterhouseCoopers (1999), for example, emphasizes the support of buying and selling processes of products, services, and information. In contrast, Wirtz (2000c) offers a more specific definition. The author extends the teleological aspects by involving the initiation, negotiation, and/or transaction of a business regarding the aim and purpose of digital business. Definition of Digital Business (Wirtz 2000c, 2020b) Digital business is the initiation as well as the partial or full support, transaction, and maintenance of service exchange processes between economic partners through information technology (electronic networks). In this context, service exchange processes refer to those processes, in which tangible and intangible goods and services are transferred in exchange for

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compensatory consideration. In the case of electronic networks, it is the combination and agglomeration of physical and mobile connections through which electronic data are transferred. Based on the above-deduced definition, the following chapters present a systematization and classification of digital business by observing interaction patterns and service exchange as well as the development of digital user structure and the respective success factors.

1.2

Actors, Interaction Patterns, and Service Exchange

Provider of Ser vice Exchange

Actors of digital business include all providers and recipients of electronic-based or electronic-induced service exchange processes (Schneider 2017). Consequently, businesses, administrations, and customers appear as actors that interact with each other and hence form the matrix of interaction patterns, which may be complemented by an intra-level. The intra-level represents the service exchange within a single group of actors. Figure 1.9 presents the respective matrix.

Administration to Business

Administration to Consumer

Administration to Administration

Consumer

Consumer to Business

Consumer to Consumer

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Business

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Business to Consumer

Business to Administration

IntraBusiness

Business

Consumer

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IntraAdministration

Recipient of Service Exchange

Fig. 1.9 Matrix of interaction patterns in digital business. Source: Wirtz (2000c, 2020b)

Different Interaction Patterns in Digital Business The providers of service exchange processes facilitate a service exchange within electronic networks. They provide goods and services that recipients use on their own initiative or request. In practice, the B2B and B2C sectors are most important.

1.2 Actors, Interaction Patterns, and Service Exchange

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The B2B sector summarizes the electronic service exchange between several companies. Thereby, the company may take the role of both the buyer and the seller. Business activity opportunities in the context of B2B are diverse, ranging from online shops to B2B marketplaces and integration of customers and suppliers (Timmers 1998). Regarding the value creation in the B2C segment, there are companies on the supply side and customers on the demand side. The service exchange may involve physical goods, digital goods, or services. An example of a service exchange with regard to physical goods is the purchase of textiles through an online shop. For digital goods, the service exchange, for instance, may include the provision of a voice-over-IP call and the additional sale of paid content. Services, in contrast, could be consulting services, purchase recommendations, or processing of user comments, for instance. In the context of digital business, B2A refers to the performance of administrative processes between businesses and public entities via electronic information and communication media. These include, for example, transactions with government bodies, such as the processing of companies’ tax matters (e.g., VAT, income tax). Intra-business refers to internal digital business applications of a company. An example in this context may be the offer of a network-based, intraorganizational advanced training. For instance, employees of Volkswagen can visit e-learning centers to improve their foreign language skills. The C2B constellation is mainly characterized by the individuals’ voluntary exchange or disclosure of data to a company. This, for example, may happen by means of databases for job applications, such as monster.com or craigslist.org, through which individuals offer their manpower to companies. Transactions between private individuals in the digital business domain refer to C2C. These transactions are not necessarily only direct purchase-sale processes, like eBay transactions; they also capture the exchange of digital goods. The Web 2.0 or social media is particularly relevant in this context. For example, a digital exchange of goods between individuals takes place on the video portal YouTube that allows its users to upload free video clips and to watch videos of other users. In general, the Internet is increasingly influenced by the interaction and networking of the users (Wirtz et al. 2014). In the area of C2A, government is the recipient of a service exchange. The customers, who in this case represent citizens, use electronically networked resources in order to transmit information to government institutions. An example is the electronic tax return (efile) of income tax. Especially in this area, the acceptance of C2A has increased steadily in recent years. In the year 2019, more than 138 million income tax returns for the tax year 2018 have been submitted electronically in the United States (e-File 2019).

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Transactions in the A2C area are rather non-commercial. A supplier of customer services in A2C is the Federal Labor Office, for instance. It offers a job exchange as well as supports and manages the interaction between the applicants and employers regarding job vacancies online. Nevertheless, in A2C there are also fee-based offers, for instance, customer information regarding specific products or companies. The A2A area in digital business refers to the electronic handling of certain information tasks between national and international authorities. Some public authorities, for example, are service providers for other authorities. Individual public authorities are also increasingly inter-connected internationally. For example, national police forces are working under the direction of Europol and mutually exchange information electronically. The intra-administration constellation refers to internal activities of public authorities, such as network-based, intraorganizational training opportunities for administrative staff. The role of the provider and recipient of the service exchange process is not determined a priori. In particular, the emergence of Web 2.0 or social media applications leads to an abandonment of traditional business structures. While formerly customers were solely recipients on the Internet, they are now able to be service providers by providing problem-solving information in the course of customer integration. Since digital business affects all areas of the value chain, its actors may be both provider and recipient of the service exchange at the same time.

Stages of Digital Business Development The integration of digital business in organizations and institutions includes four stages of development that particularly differ with regard to their complexity and added value. In its simplest form, a digital business solution is limited to a purely organizational and product/service presentation, as well as to the publication of information for relevant target groups, such as potential customers or investors. In a further stage of development, the Internet service is personalized, as in the case of commercial companies that add pre- and post-sales activities to their business offers. These include customer inquiries, communication via email, general offers, or sending information. In a third stage, there is further the possibility of completing transactions online. Finally, at the fourth stage of development, there is the possibility of electronically integrating transaction partners in the value-added processes. Figure 1.10 illustrates the various stages of development of digital business.

1.2 Actors, Interaction Patterns, and Service Exchange

Stage of Development 4: Value and Partner Integration

Economic Activity/ Value Creation Stage of Development 3: Commercial Transaction

Stage of Development 2: Communicational Interaction Stage of Development 1: Static Presentation

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• Online transaction, e.g., conclusion of sales contracts • Back office integration

• Electronic integration of transaction partners into value creation processes • Highest stage of interactivity

• Pre- and aftersales services • Customer request, e.g., via email • Sending information

• Product and business description • Static content • No personalization • Publication of company information

Complexity

Fig. 1.10 Stages of digital business development. Source: Wirtz (2000c, 2020b)

Digital Market In addition to the specific attributes of service exchange processes and the development stages of digital business, there are also fundamental changes in the process structure compared to traditional economy (Chesher et al. 2013). Figure 1.11 shows a highly simplified service exchange process. The digital marketplace is at the center of digital business transactions and the place where supply and demand merge, just like in the traditional economy. The market access in the digital business domain, in contrast, partly differs from the one of traditional business.

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Handling of Payments • Creditworthiness management • Debt collection • Authorization • Security

• Addressability • Information processing and transmission

Agent/ Aggregator supply side • Generation of customer needs • Bundling consumer profiles • Customer service

Digital Market Place • Merging supply and demand • Trading • Authentication • Privacy/ integrity • Order management

direct access

Agent/ Aggregator customer/ user side • Requesting and structuring quotes • Search support

Market Access customer/ user side • Addressability • Information processing and transmission

Customer/User

Provider

Market Access supply side

direct access

Distribution and Logistics • Distribution • Logistics services • Customer service

Fig. 1.11 Digital market model of Internet economy. Source: Wirtz (2000c, 2020b)

On the one hand, suppliers of products and services require market access in order to interact in the digital marketplace. Here, particularly technical aspects are important. Product-specific information has to be processed in a manner that makes them transferable to the market. This requires special hardware and software. If these conditions are met, the supplier may choose between a direct market entry and an intermediary agent or aggregator in order to operate in the digital market. In the former case, the supplier himself has to create customer needs, bundle customer profiles, or offer customer service. In the latter case, the agent or aggregator is responsible for these tasks. On the other hand, customers also require market access. In this context, there are several service providers, who offer Internet access to individuals. For customers, it is also important to transmit information such as product needs into the market. Just like the supply side, they can also choose between different options of market access (Papazoglou and Ribbers 2011). The intermediary agent or aggregator undertakes the task of collecting and structuring offers, as well as supporting the customers in their product and service search. Payment processing and distribution require third-party involvement to some extent. Distributors such as FedEx deliver the ordered products to the customers. Payment processing includes creditworthiness management, debt collection authorization, and security. Credit card companies and online payment services such as PayPal or Amazon Pay undertake these tasks. Having discussed the dynamics of the digital market, the next section deals with the different activities of digital business.

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23

Activities of Digital Business Activities of digital business systematize the concept in functional respects. According to this, digital business consists of the following activities: e-commerce, digital collaboration, digital communication, digital education, and digital information/entertainment. This functional division results from the divergent characteristics and intentions of the respective activities. Figure 1.12 combines these activities with the actors of digital business.

Actors

Activities

Enterprises/ Institutions (public/ private)

Consumers

Digital Information/ Entertainment • Provision of informative and/or entertaining contents and concepts

e-Commerce • Initiation, negotiation and/or conclusion of trading transactions

Digital Education • Transfer of education and training services

Digital Communication • Provision of communication platforms and opportunities for data/information exchange

Digital Education • Transfer of education and training services

Digital Collaboration • Interactive, inter and/or intraorganizational collaboration

e-Commerce • Initiation, negotiation and/or conclusion of trading transactions

Digital Communication • Provision of communication platforms and opportunities for data/information exchange

Fig. 1.12 Actors and activities of digital business. Source: Wirtz (2000c, 2020b)

E-commerce includes the service exchange processes of initiation, negotiation, and conclusion of trading transactions between economic agents by means of electronic networks. The actors use the opportunities of information and communication technologies to sell goods and services, as well as to simultaneously avoid the costs of physical presence (Turban et al. 2015). The aim of e-commerce is to realize efficiency gains, potentials of cost reduction, and convenience benefits during a (trading) transaction (Hsu et al. 2006). This does not only apply to the intra- and interorganizational field but also pertains to the efficient arrangement of companyto-end customer relationships. E-commerce activities, for example, refer to electronic price negotiations or signing supplier invoices by means of digital signatures. Digital business enterprises therefore often engage in e-commerce. However, digital business is the broader

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concept since it also includes processes that go beyond the purchase and sale of products, for instance, the provision of product-related information and the exchange of (costless) teaching material by means of electronic networks. Thus, e-commerce may be subsumed under the broader term of digital business. Definition of E-Commerce (Wirtz 2000c, 2020b) E-commerce involves the electronic support of activities that are directly related to the purchase and sale of products or services through electronic networks. Digital collaboration enables time- and distance-independent cooperation by supporting processes of cooperation and adapting them to business activities (Wirtz and Vogt 2003). Furthermore, the possibility of intermediate storage allows to coordinate the results of cooperation and to transfer information-based components. The aim of digital collaboration is to optimize processes, applications, and data transfers that are associated with service provision or service exchange processes. Here, companies seek to achieve economies of scale and economies of scope by integrating and using complementary organization-specific resources. Unbundling existing goods and services and recombining them in changed profiles further promote digital collaboration (Warkentin et al. 2001). Definition of Digital Collaboration (Wirtz 2000c, 2020b) Digital collaboration refers to electronic, network-based, interactive, and intraor interorganizational cooperation. Digital communication aims at providing communication opportunities for taskrelated or interest-based understanding. The possibility of intermediate storage allows to coordinate communication and make it more flexible. Communication may not only occur at the intra- and interorganizational level but also at the retail level. The one- or two-way communication process takes place by means of information and communication technologies, such as email, video conferencing, and the new opportunities of social media. Definition of Digital Communication (Wirtz 2000c, 2020b) Digital communication refers to the paid and non-paid provision and use of network-based and electronic communication platforms. The aim of digital education is the resource-efficient delivery of educational services via location- and time-independent application of electronic networks. Here, the company itself or third parties outside the company can offer network-

1.2 Actors, Interaction Patterns, and Service Exchange

25

based education. With regard to the recipients of education and training services, one can distinguish between individual concepts of education and training and concepts designed for a mass audience. Especially in light of growing financial restrictions, providers of education services are increasingly forced to supply their services cost-effectively. They are also required to deal with greater competition due to the increasing demand for educational services. Digital education is particularly able to cope with these restrictions and challenges due to the technological possibilities of the Internet economy. On the one hand, the digital educational infrastructure allows developing new training tools and concepts, such as multimedia learning modules for selfcontrolled learning progress or online exchange processes with teachers and instructors for feedback and improvement of educational processes. On the other hand, existing functions, such as the aggregation and distribution of educational content, can be designed and performed more efficiently (Twigg and Miloff 1998). Definition of Digital Education (Wirtz 2000c, 2020b) Digital education refers to the transfer of education and training services to third parties by means of electronic networks. Digital information/entertainment uses information and communication applications to facilitate access for recipients to decision-relevant, time-sensitive, or stimulating and entertaining content. Due to its attributes, this content is an intangible good that is not consumed even when it is used multiple times. When producing, reproducing, and distributing content, efficiency and cost advantages can be realized that result from the characteristics of the Internet economy. Definition of Digital Information/Entertainment (Wirtz 2000c, 2020b) Digital information/entertainment refers to the provision of informational and/or entertaining content and concepts for third parties by means of electronic networks. The above-mentioned definitions delineate the digital business activities from one another and describe their “pure forms.” Thus, the demarcation of e-commerce, digital collaboration, digital communication, digital education, and digital information/entertainment reflects the phenomenon of digital business from a theoretical and conceptual perspective. However, companies usually apply these activities in combination in the corporate practice. Moreover, a clear distinction is rarely possible, so overlaps may occur.

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1.3

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Foundations of Digital Business

Development of Digital User Structure

Understanding user structure in the information and communication technology sector is crucial for successful digital business applications. The diffusion of end devices and network connections as well as the acceptance of specific basic services determine the scope of digital business submarkets (Chesher et al. 2013). Therefore, the following section gives an overview of demographic data of Internet users and subsequently presents a user typology of digital business.

Digital User Characteristics Internet usage in the United States and worldwide has steadily increased over the last decade. Meanwhile, also the elder population that hardly used the Internet in the past is online. The reason for that is the general acceptance of the Internet, the costeffective access to high-speed broadband lines, and the high ease of use. Table 1.2 presents a demographic classification of Internet usage. Table 1.2 Demographic classification of Internet users in the United States Internet users Male Female 14–17 18–29 30–49 50–64 65 or older College+ Some college High school Less than high school

2010 (%) 72 77 76 87 92 85 74 43 93 87 68 41

2012 (%) 79 83 82 91 96 91 79 54 96 91 75 55

2015 (%) 88 85 84 94 96 93 81 58 95 90 76 66

2018 (%) 89 89 88 N/A 98 97 87 66 97 93 84 65

2019 (%) 90 90 91 N/A 100 97 88 73 98 95 84 71

Data source: Pew Research Center (2019a)

The classification shows that all population groups widely accept the Internet today. In 2019, 90% of the US population over 14 years used the Internet. The gender distribution reveals that meanwhile slightly more women than men are active on the Internet. The same pertains to the age structure. People in the 50+ generation, often referred to as “silver surfers,” increasingly discover the Internet for themselves. With regard to the educational level, the vast proportion of pupils as well as individuals with high school or university degree use the Internet regularly. For both groups, the main reason for usage is the need for current and easily accessible information for school, university, or professional use. While the Internet in its early days was primarily used to retrieve information or as a communication tool in the business sector, people now also use it for entertainment and private recreation. Table 1.3 provides US Internet users’ most popular online activities.

1.3 Development of Digital User Structure

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Table 1.3 Most popular online activities of adult Internet users in the United States

Uses email Shops, makes travel reservations, or uses other customer online services Watches videos Uses online social networks Uses text messaging or instant messaging Searches health information online Searches for job online Uses financial services like banking, investing, paying bills

Total US Users (%) 90.8 68.5

15–24 (%) 91.0 62.9

25–44 (%) 93.4 74.2

45–64 (%) 90.5 69.4

65+ (%) 85.8 60.2

69.5 74.4 90.2 48.0 20.8 65.9

86.4 88.2 95.7 34.5 34.5 53.2

81.7 83.8 96.4 52.0 26.6 76.5

61.2 67.5 89.7 51.1 15.1 66.6

40.2 52.0 70.8 48.7 4.4 54.6

Data source: NTIA (2018)

Online Activities This overview demonstrates that certain activities within each age group vary considerably. In particular, younger Internet users are more interested in entertaining and communication-oriented activities than older users. In this context, the interactive and collaborative applications of the Web 2.0 or social media play an important role. Here, the Internet provides novel offers and services to users, such as online social networks or video portals. As it turns out, the Internet market in the United States is very mature and well developed. The user behavior of the US population differs depending on age and other characteristics of individuals. In other countries with mature markets, the Internet user behavior is also heterogeneous, and there are various types of users in today’s digital society. For this reason, the following section presents a user typology that reflects a classification of German Internet users based on their essential characteristics. Within the total number of Internet users, there are various types of user behavior. While, for example, some users primarily use the Internet for retrieving selective information, others consider the Internet as a source of entertainment and multimedia (TNS Infratest 2015).

Digital User Typology Classification parameters for the Internet user typology are digital access, digital competence, digital usage, and digital openness. These parameters, in turn, form the dimensions of “access and competence” and “usage and openness.” According to this typology, the German population consists of seven user types: “offliner,” “minimal onliner,” “domestic casual user,” “cautious pragmatist,” “reflected

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professional,” “progressive user,” and “technology enthusiast.” Moreover, these types can be classified based on the so-called D21 Digital Index, which represents the degree of digitization of Germany on a scale ranging from 0 to 100. The index value 100 is the target size that reflects the ideal state of the digital society in Germany from today’s perspective (see for the following Initiative D21 2019). Before presenting the individual types in detail, Fig. 1.13 gives a first overview of the Internet user typology.

reflected professionals (19%)

progressive user (12%)

technology enthusiasts (6%)

Access and Competence

cautious pragmatists (10%) domestic casual user (32%)

minimal onliner (5%)

offliner (16%)

Usage and Openness

Fig. 1.13 Overview of the user structure in the digital society. Source: Initiative D21 (2019)

With four index points, the type “offliner” has the lowest level of digitization and represents 16% of Internet users. Having an average age of 71 years, this type involves the oldest users of the seven types with rather a low formal education. There are also more female users than male users in this group. In general, the “offliner” hardly perceives the use of the Internet as beneficial. Although about 59% of this user type have simple mobile phones, most users of this type do generally not use mobile devices such as smartphones and tablets. The type “minimal onliner” has 30 index points and represents 5% of Internet users. The average age is 63 years, and this type has more female than male users. Further, the “minimal onliner” has a medium formal education and a low digitization level. A proportion of 50% of the “minimal onliners” own a laptop and 31% a smartphone. With 56 index points, the type “domestic casual user” has an average level of digitization and represents 32% of Internet users. The average age is

1.4 Success Factors of Digital Business

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52 years, and female users represent the majority within this type with a medium formal education. For many of the “domestic casual users,” the Internet fulfills information purposes as 86% particularly use it to search for information. The type “cautious pragmatist” has an average level of digitization with 63 index points and represents 10% of Internet users. With an average of 40 years, the majority is also female. “Cautious pragmatists” have a medium income and are very careful in using the Internet in order to protect their personal data. The type “reflected professional” shows a high level of digitization with 76 index points and represents 19% of Internet users. With an average of 44 years, these users are rather male and well-educated and have a high monthly income. They also use the Internet proactively and critically and take safety considerations seriously with 91% using an antivirus software. The type “progressive user” has also a high degree of digitization with 80 index points and represents 12% of Internet users. With an average of 36 years, this type consists of well-educated, mainly male users. “Progressive users” like to use mobile devices and have acquired a certain application expertise. The type “technology enthusiast” shows the highest level of digitization with 82 index points and represents 6% of Internet users. With an average age of 36 years, these predominantly male users have a high formal education and are interested in the Internet and technological innovations. Technical innovations and applications such as wearables or language assistants characterize the “technology enthusiast,” who uses the Internet for about 9 hours per day. Having discussed the basics as well as activities and success factors of digital business in general, the following presents specific types of digital business. Therefore, the next section first observes mobile business by considering basics, specific mobile applications and respective user groups, as well as the success factors of mobile business.

1.4

Success Factors of Digital Business

In the last decades, the number of digital business activities has increased due to the rapid development of information and communication technology. Along with this increase in activities, measuring success of digital business projects has become even more complex and hence a very important topic for companies (Beynon-Davies 2013). Therefore, the following section presents the success factors of digital business. Through the development of innovative information and communication technologies, fundamental new business approaches have emerged on the Internet (Onetti et al. 2012). Numerous factors affect the development and success of digital business (Wirtz et al. 2003b). On the one hand, these factors are prerequisites for the formation and development of digital business. On the other hand, some factors possess catalytic attributes that further accelerate the current development of digital business (Laudon and Traver 2017).

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The digital business environment, which is strongly influenced by technological innovations, demands the dynamic capabilities and resources of a company (Zhu et al. 2006). The definition and implementation of a digital business strategy significantly contributes to a company’s performance and can ensure its long-term success under these ever-changing conditions (Beheshti and Salehi-Sangari 2007). Such strategy especially demands four dynamic abilities: digital innovativeness, strategic and organizational flexibility, networking and integration capability, as well as ease of use.

Digital Innovation Capability The variety of technological innovations in information and communication technology forces companies to follow the market and assess the opportunities and risks of these innovations. The mere ability to innovate does not secure long-term market success. The product and process design in digital business rather requires to take into account a combination of pricing strategy, customer benefits, and tradability of goods (Chen et al. 2004). In this context, not only physical but also digital goods or content need to be considered. This is crucial for the success of digital business. Providers of interesting content will be able to win customers easier, if the latter perceive the content as attractive and novel. Since the usage intensity is frequently decisive for success, digital businesses need to set themselves apart from the content offered by the World Wide Web as a whole. Therefore, they also need to differentiate themselves from traditional distribution channels, for example, by designing an innovative, experience-oriented shopping offer (Park et al. 2012; Azam 2015).

Strategic and Organizational Flexibility The strategic and organizational flexibility is a further key success factor for companies in the context of digital business (Camra-Fierro et al. 2012). While in the traditional economy companies were often surrounded by a relatively rigid environment, they now face a continuous change in the Internet economy. Accordingly, the corporate processes and organization structures need to take account of this in order to meet the market demands as quickly as possible. Thus, companies should increasingly focus on the customer. The opportunities of digital business go beyond an additional distribution channel for traditional products. On the one hand, the digitized world provides the potential to develop and sell new offers. On the other hand, the value of physical or traditional products increases by means of digital value-added services through which a company can generate competitive advantage. Furthermore, digital business has the potential to offer numerous product variants in mass markets (Chaffey 2015). In this context, a company’s flexibility to be able to react to current trends is a crucial success factor of digital business. The efficient integration of information, services, products, and processes represents a basic idea of digital business. Electronic networks allow to avoid media disruptions and

1.4 Success Factors of Digital Business

31

connect numerous users. Accordingly, the networking and integration ability is a critical component of doing digital business.

Capability for Networking and Integrating Companies need to customize an offer at the technological and content level that combines functionally relevant information and processes, which generate an added value compared to traditional business. Here, inter-connectedness, for instance, in terms of network effects may serve as a driver of digital business process development or may also be applied through platform-specific lock-in effects as a customer loyalty instrument. An example of a network effect is the increasing diffusion of the instant messaging client WhatsApp. Given that the value of a product or service depends on the number of others using it, the growing number of connected users increases the benefit for each individual because they can reach a higher number of users. However, the number of users needs to reach a certain critical mass in order for them to reap the benefits of their network (positive network effect). Customers or users using products or services that are reliant on the reach of a critical mass are frequently locked-in. This so-called lock-in effect refers to the situation where the customers or users can only consume the aftermarket goods produced by original equipment manufacturers, because the compatibility between primary and aftermarket goods is associated with switching costs with regard to the original equipment. A lock-in effect, for example, can be seen in Apple’s mobile platform App Store for the iPhone or iPod Touch. The platform-internal inter-connection of clients creates the basis for a market of third parties that offer additional functionality for devices. As a result, the attractiveness of devices increases, leading to the effect that more customers choose to use the Apple platform. In addition, it binds customers permanently to the platform.

Ease of Use The ease of use of digital business applications is another key success factor. In this context, the design of business processes and navigational interfaces are considered under the aspects of efficiency and general accessibility. Since digital business applications aim to simplify economic transactions, the design of their electronic processing should not replace old problems with new ones. For instance, it is reasonable to maintain the basic logic of individual business processes in digital business. The digital shopping cart used by online stores is a good example in this context. From offline transactions, customers are used to collect single shopping items until leaving the store in order to pay at the end of their purchase. Therefore, customers or users also expect this functionality in online transactions. Overall, companies need to focus on customer or user needs when it comes to ease of use. Figure 1.14 presents a summary of the four key success factors.

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Digital Innovation Capability

Foundations of Digital Business

Strategic and Organizational Flexibility

• Market analysis/customer needs

• Dynamic environment of the Internet economy

• Evaluation of risks and opportunities of a innovation

• Focusing on customer relationship

• Physical vs. virtual goods

Capability for Networking and Integrating

• Capability of adapting to market structure at different company levels

Ease of Use

• Digital combination and processing of information

• Efficiency of and access to business interfaces

• Resources and time advantage through electronic networking without media disruption

• Focus on customer/user needs

• Transfer of offline basics to e-Business

• Network effects and lock-in effects

Fig. 1.14 Success factors of digital business. Source: Wirtz (2010b, 2020b)

1.5

Summary

• Over the last two decades, digital business has developed into a dominant economic sector. • Digital business can be defined as the initiation as well as the partial or full support, transaction, and maintenance of service exchange processes between economic partners through information technology (electronic networks). • The four development stages of digital business can be divided into static presentation, communicational interaction, commercial transaction, as well as value and partner integration. They can be distinguished in terms of their economic value creation and their complexity. • The digital market model consists of the market access supply side as well as the agent/aggregator supply side from a provider perspective and the market access customer/user side as well as the agent/aggregator customer/user side from a customer/user perspective. These parties interact in the digital marketplace. The functionality of this digital marketplace depends on the consistent support and coordination by payment providers as well as distribution and logistics suppliers. • The Internet is now equally used by all age groups. Only the population over 65 is lagging behind with a comparatively small share of 73%. • Digital business covers different interaction patterns ranging from business to business, business to consumer, and consumer to public administration. • The activities of digital business are e-commerce, digital collaboration, digital communication, digital education, and digital information/entertainment. • The user structure of the digital business can be divided into the following seven groups: offline users, minimal onliners, domestic casual users, cautious pragmatists, reflected professionals, progressive users, and technology enthusiasts. • The general success factors of digital business are the digital innovation capability, strategic and organizational flexibility, the capability for networking and integrating, as well as the ease of use.

1.5 Summary

Chapter 1 Questions and topics for discussion

Review questions 1. Outline the development of information and communication technology. 2. Define digital business. 3. Identify both the providers and recipients of service exchange in digital business and provide examples of their interactions. 4. Explain the Digital Market Model of the Internet Economy. 5. Name the four success factors of digital business and describe them.

Topics for classroom discussion and team debates 1. Discuss the changes that the Kondratieff-cycle of digitalization causes? 2. Discuss the perspectives of an information society against the background of data security as well as personal and privacy rights. 3. Discuss how the digital market model will change in the future. Who will economically and socially benefit and who will not?

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Mobile Business

Contents 2.1 Basics of Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relevance of Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure of Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mobile Business Market and Its Market Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition and Classification of Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Applications and User Structure of Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mobile Applications and Mobile Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mobile Browsing and Mobile Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mobile Information, Mobile Entertainment, and Mobile Navigation . . . . . . . . . . . . . . . . . . . . . . . Mobile Commerce, Mobile Communication, and Mobile Payment . . . . . . . . . . . . . . . . . . . . . . . . Mobile Advertising and Mobile Telemetry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Success Factors of Mobile Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customization and Mobile Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Absence of Media Disruption and Seamless Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software Platform and Integration Degree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bandwidth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36 37 38 39 43 45 45 48 49 51 53 57 58 58 59 59 60

Learning Objectives By working through this chapter, you will be able to: 1. Understand the market dynamics of mobile business and explain its relevance in the information society. 2. Analyze the strategies of mobile business market leaders. 3. Distinguish the different mobile applications and mobile services and describe their configuration. 4. Know the essential user preferences and structures of mobile business. 5. Identify success factors of mobile business.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_2

35

36

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Mobile Business

With the rapid development of transmission technologies and wireless devices, mobile business (m-business) has emerged as a new application (Gay et al. 2007). Both scientific and practical publications consider the location-independent form of digital business and its impact (Wirtz and Mathieu 2001). Meanwhile, there is an increasing number of studies that observe the potential of m-business, confirming its high market potential (Scott 2015). Against this background, Section 2.1 introduces the field of m-business with respective definitions and classifications. The following Section 2.2 then presents m-business applications and user groups. The last Section 2.3 outlines success factors of m-business.1

2.1

Basics of Mobile Business

The foundation of all kinds of m-business are mobile networks, mobile devices, and the critical mass of mobile users (Lu et al. 2008). Figure 2.1 provides an overview of the development of mobile phone subscriptions worldwide.

Subscriptions in Million 9000 8304 8000

7511 6996

7000

7814 7911

7181

6661 6261 5890

6000 5290 5000

4640 4030

4000

3368 2745

3000 2205 1765

2000 1000

962

1159

1418

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Fig. 2.1 Development of mobile phone subscriptions worldwide. Data source: ITU (2019a)

1

See for the following chapter also Wirtz (2020b).

2.1 Basics of Mobile Business

37

Relevance of Mobile Business The number of mobile phone subscriptions worldwide has increased by approximately 15% within the last five years, reaching 8304 million subscriptions in 2019. The growing enthusiasm for data-intensive mobile applications can be seen as a driver of this development. In particular, the ability to retrieve important information independent of time and location is important. A more precise assessment of the potentials and risks of mobile business requires knowledge of the use of mobile services and a thorough understanding of the dissemination of technical prerequisites. In general, mobile Internet use gains more and more recognition and therefore must be taken into account when developing mobile business strategies. Figure 2.2 illustrates the regular use of different mobile Internet services. In this context, it is particularly noticeable that mobile gaming is used very frequently (22.16%). This indicates that the continuous improvement of smartphone graphics resolution in recent years has led to the replacement of mobile game consoles by smartphones. In addition, games can be downloaded relatively easily on the respective platforms or are even available as pure online or cloud games. Thus, a wide range of different games is available regardless of location and time. Apart from that,

Weather Catalogs Navigation Stickers News Medical Reference Photo & Video Sports Social Networking Shopping Music Finance Book Productivity Health & Fitness Food & Drink Travel Entertainment Utilities Lifestyle Education Business Games

0,26% 0,42% 1,09% 1,21% 1,85% 1,92% 2,00% 2,04% 2,15% 2,25% 2,27% 2,34% 2,43% 2,45% 3,03% 3,35% 3,43% 3,83% 5,84% 6,02%

8,62% 8,69% 10,10% 22,16% 0%

5%

10%

15%

20% 25% Usage in percentage

Fig. 2.2 Regular use of mobile services in 2019. Data source: Pocket Gamer (2020)

38

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Mobile Business

mobile business services with 10.1% and education services with 8.69% are used quite frequently. This is not surprising given that business activities are becoming increasingly mobile and educational institutions such as schools and universities are pressured to digitize their teaching offer. In contrast, mobile weather, catalog, and navigation services are rather used on a non-regular basis. This could be due to the fact that such applications are typically used for a limited period of time, while regularly used services such as mobile games and mobile business applications demand users over a longer period of time. Table 2.1 depicts the volume of the US mobile commerce market from 2015 and also provides a forecast of the future development of the market volume until 2024. While the US mobile commerce market volume was 63.6 billion USD in 2016, it had almost doubled to 120.1 billion USD by 2018. Looking ahead, the US market volume of mobile commerce will continue to grow and is expected to reach around 488.0 billion USD in 2024. In this regard, it becomes apparent that the mobile commerce market has not reached its peak yet and that there is still tremendous growth potential for companies.

Table 2.1 Volume of the US mobile commerce market 2015 2016 2017 2018 2019a 2020a 2021a 2022a 2023a 2023a

Smartphone Sales (billion USD) 26.5 46.0 75.6 95.8 128.4 170.3 221.2 276.1 344.5 418.9

Tablet Sales (billion USD) 15.1 17.6 21.2 24.6 28.5 34.7 41.8 48.1 56.7 69.1

Total (billion USD) 41.6 63.6 96.8 120.4 156.9 205.0 263.0 324.2 401.2 488.0

Data source: Meola (2019) Forecast

a

Infrastructure of Mobile Business Figure 2.3 illustrates the global development of mobile and stationary broadband subscriptions. In comparison to Fig. 2.1, this statistic only refers to mobile subscriptions that have a data transfer rate of at least 3G. Since fast mobile broadband Internet is not widely available in emerging and developing countries, the values of this statistic are comparatively lower than those of Fig. 2.1.

2.1 Basics of Mobile Business

39

Subscriptions in Million 7000 6376 6000

5327 5000

4646 3867

4000 3303 3000

2664 1951

2000

1544

1000 346 268

1181 816 642 615 527 592 411 422 468

722

685

834

911

1004

1069

1144

0 2007

2008

2009

2010

2011

2012

Fixed broadband subscriptions

2013

2014

2015

2016

2017

2018

2019

Mobile broadband subscriptions

Fig. 2.3 Development of mobile and stationary broadband subscriptions. Data source: ITU (2018, 2019b)

It shows that in 2019, the number of mobile broadband subscriptions (6.376 million) is almost six times higher than the number of stationary broadband subscriptions (1.144 million). Furthermore, the number of mobile broadband subscriptions has increased by approximately 16% within the last year. Overall, fixed broadband subscriptions have grown significantly slower than mobile broadband subscriptions. In addition, the actual number of mobile broadband users exceeds that of fixed broadband users. Mobile phones also provide Internet access to potential users that so far have no stationary Internet connection.

Mobile Business Market and Its Market Leaders The m-business market consists of several submarkets. More specifically, there are both mass markets such as mobile browsing or mobile music and smaller markets such as remote medical monitoring. The submarkets of m-business with the largest market potential are mobile browsing, mobile music, location-based services, and mobile advertising. In each market, there is competition among specialized providers, although they do not necessarily operate in the same industries. Looking at the mobile Internet sector, for example, Apple, Microsoft, Google, and Facebook, each seeks a leading market position. In this context, they each have specific strengths and weaknesses that enable different potentials and strategies. Figure 2.4

40

2 Strengths • Interface design • Successful content

Apple

platform iTunes • High degree of control due to

Weaknesses • Premium price image/costbenefit ratio • Missing compatibility with

Mobile Business Objectives

• Enlargement of proprietary

platforms by new applications and user groups

Android

closed system

• Recourses and competencies by means of developing

Microsoft

operation systems

• Successful online search and online services

Google

• Late adoption of mobile strategy • License model under threat

• No contract bond to end consumers

• Networking between stationary and mobile Internet through cloud services

• Developing and expanding supremacy in the field of

mobile online search

• Possibility of cross-platform usage

• Successful mobile Facebook App • WhatsApp as a mobile instant

Facebook

messenger

• No contract bond • Increasing negative image due to monopoly position and

• Developing and expanding supremacy in the field of mobile social media

acquisitions

• Instagram as mobile social media

Fig. 2.4 Corporate positions in the mobile Internet market. Source: Wirtz (2010b, 2020b) and own analysis and estimations

illustrates the corporate positions of this submarket exemplified by these four global players. A prerequisite for success is the rapid spread of mobile phones, tablets, and smartphones. Against this background, m-business benefits from the increasing spread of mobile phone subscriptions as illustrated in Fig. 2.1 and in particular from the increasing number of mobile broadband subscriptions shown in Fig. 2.3. Thus, the penetration rate of mobile phones is higher than that of any other communication device. However, in some countries the number of devices even exceeds the number of residents due to the trend toward owning a second or third phone. Long-term success in m-business requires strategic alignment of resources and competencies with customer needs and technological opportunities.

2.1 Basics of Mobile Business

41

Apple Inc., for instance, has created an integrated offering that binds the customer in the long term and thus enables high returns. First, Apple has developed a technologically advanced smartphone with the iPhone that had a competitive advantage for a long time, especially in terms of ease of use, mobile browsing, and displaying photos and videos. Their marketplace App Store brings along another competitive advantage by allowing third parties to offer additional functionalities for download. Here, the third party determines the price and Apple gets 30% commission for each unit sold. Customers may review the apps and thus contribute to relevant rankings. These community elements create trust toward the platform and customer loyalty. In addition, iPhone users can use Apple’s iTunes content platform that provides paid music and video content. Hence, users can benefit from the multimedia capabilities of the iPhone. This innovative integration of existing concepts based on an intuitive user interface has enabled Apple to generate a significant added value for its products and to develop unexploited market potentials. The basic characteristics of the services offered by Apple allow to draw conclusions with regard to their integrated m-business strategy. In this context, the relevant actors and interaction partners involved are end users, developers of additional programs, as well as providers of audio and video content. Apple offers an integrated proprietary platform to the end customer that not only facilitates mobile communication via different channels but also provides extensive multimedia functions. Content and additional functions are provided directly via devices. Here, Apple acts as a gatekeeper that exercises control and participates financially. Therefore, Apple provides the platforms iTunes or App Store that offer an additional benefit in terms of user reviews. The rates charged for additional services are variable. However, the majority refers to micropayment. In total, Apple acts as an information intermediary. Figure 2.5 illustrates the integrated mobile business strategy of Apple. To address the increasing relevance of m-business, the following section presents different definitions of m-business and classifies this phenomenon accordingly. Moreover, applications and developments of m-business are examined in more detail. Finally, success factors of m-business are identified.

• Digital marketplace for compatible programs

App Store Platform

Expanded function

• Integrated mobile phone/tablet as communication and multimedia tool

iPhone/iPad

Expanded content

• Digital marketplace for audio and video content

End Customer

2

Fig. 2.5 Integrated mobile business strategy of Apple. Source: Wirtz (2010b, 2020b) and own analysis and estimations

Independent Programmer

• Transaction support

• Attractive market structure

• High user number

Content Provider

iTunes-Platform

42 Mobile Business

2.1 Basics of Mobile Business

43

Definition and Classification of Mobile Business Given the popularity of Internet-enabled mobile phones and tablets, the PC is no longer the dominant medium for accessing the Internet. Hence, from a customer perspective, it is no longer required for digital business (Wei 2014). The customer potential and the related possibility to introduce new applications and business models make m-business an interesting market. Comparing various publications on m-business reveals that there is no uniform definition of m-business so far. The definitions are often based on those of digital business or e-commerce and supplement them by the use of mobile devices. This explains why the definitions of m-business and mobile commerce are blurring such as the definitions of digital business and e-commerce. The definitions listed in Table 2.2 illustrate this fact by providing exemplary definitions. Table 2.2 Selected definitions of mobile business and mobile commerce Author(s) Durlacher Research (1999) Andersen Consulting (2000) Wirtz and Mathieu (2001) Jelassi and Enders (2008)

Sari and Bayram (2015)

Definition The working definition of mobile commerce [...] is any transaction with a monetary value that is conducted via a mobile telecommunications network. Mobile commerce is electronic commerce based on mobile telephony, short-range wireless lines, voice recognition, and interactive digital TV. M-Commerce refers to electronically added handling of business transactions based on the usage of mobile devices. Mobile e-commerce, or m-commerce, is a subset of electronic commerce. While it refers to online activities similar to those mentioned in the electronic commerce category, the underlying technology is different since mobile commerce is limited to mobile telecommunication networks, which are accessed through wireless handheld devices such as mobile phones, handheld computers, and personal digital assistants (PDAs). [. . .] defined the mobile commerce as any transactions using a wireless device that result in the transfer of monetary value in exchange for information, goods, or services.

Source: Wirtz (2020b)

Since the definitions of m-business and mobile commerce largely stem from those of digital business and e-commerce, they include similar subject-related, functional, and teleological aspects. Against this background, the definition of digital business should be expanded by adding the aspect of mobile access through mobile devices. Definition of M-Business (Wirtz 2010b, 2020b) M-business refers to the initiation as well as the partial and full support, transaction, and retention of service exchange processes between economic partners by means of electronic networks and mobile devices.

44

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Mobile Business

As part of m-business, most definitions describe mobile commerce as a transaction carried out using mobile devices and characterized by a monetary value. In contrast, the concept of m-business is broader and refers to all services exchanged via mobile devices. Against this background, m-business is not restricted to mere transactions and therefore also used according to this understanding in the following. M-business is subordinate to digital business. Compared to digital business, the data flow in m-business takes place via mobile communication networks. The aspect of mobility creates a benefit that goes far beyond a merely technological benefit. From a business perspective, the focus should rather be on new business models and enhancement of customer value (Lee 2013; Michelini and Fiorentino 2012). M-business can be characterized by using the following four criteria: mobility, accessibility, localization, and identification of mobile subscribers (Ascari et al. 2000). The fact that users have their mobile phone available anywhere and anytime means that they can access networks, products, and services anywhere and anytime. This is particularly relevant in terms of time-sensitive information, such as stock market prices. The permanent availability of users is another relevant factor. The providers of products and services are no longer dependent on Internet users sitting at a desktop PC and having an Internet connection, but they can now send offers to mobile Internet users anytime, as far as law permits it. Reputable providers ask for permission to send relevant messages, also in order to increase acceptance. This is called permission marketing (Kaplan 2012). Many of the current mobile services are pull applications. This means that the users actively ask for products and services or opt in to receive mobile advertising (Watson et al. 2013). Thus, the owner of a mobile phone may get information in terms of event news such as traffic news, weather, as well as lottery and sports results. In contrast, push applications, for instance, are breaking news of news apps. Here, users may receive current and personalized news mobile without having to search for the information. The mobile subscribers can be located via their mobile devices. This results in a whole range of new applications such as local information services. For instance, companies or restaurants offer information and deals via SMS or specific mobile apps when the potential customer passes the shop or restaurant. Mobile localization is also interesting for parents with regard to the supervision of their children. The location-based service “TrackYourKid” localizes the mobile phone of the child with the accuracy of a few meters through the network operator. “TrackYourKid” retrieves the data and sends the current position of the child back to the parents via SMS or the web (Track Your Kid 2016). Another differentiating factor is the possibility of personal identification via mobile phones. When buying a phone, mobile subscribers make a personal registration that allows identifying them through the SIM card. The mobile phone thus becomes a personal “document” and can fulfill, for example, the functions of a credit card and be used as a payment system (Allums 2014). Besides sending standardized information, service providers also have the opportunity to send personalized information. In addition, the mobile service providers may gather personal information and use it to generate user profiles and create customized applications and services (Laudon and Traver 2017).

2.2 Applications and User Structure of Mobile Business

2.2

45

Applications and User Structure of Mobile Business

Mobile communication has become an integral part of modern information and communication society. This development not only has implications for the telecommunications industry but also significantly changes the entire economy. In this regard, the mobile broadband Internet is a key technology. This subsection presents different mobile applications associated with m-business and describes its user structure.

Mobile Applications and Mobile Software Mobile Applications The bases of applications in m-business are powerful mobile devices and fast data transfer technologies of mobile networks (Scott 2015). In this context, various devices and transmission standards are used simultaneously. Figure 2.6 gives an overview of particularly relevant technologies and device classes.

Devices Mobile Business/Mobile Internet Simple Internet Mobile Phones • Nokia 216 • LG Xpression 2 • ZTE Z233

Smartphones

E-Reader/Tablets

Netbooks

• Apple iPhone XR/XS

• Amazon Kindle Paperwhite

• Apple MacBook Pro

• Samsung Galaxy S 9

• Apple iPad Pro 12.9

• Asus ZenBook Pro

• Nokia Lumia 950

• Samsung Galaxy Tab S5e

• Lenovo ThinkPad X1

•…

•…

•…

•…

Transmission Standard Mobile Internet UMTS

HDSPA

HSUPA

• Mobile network 3rd generation

• Downlink expansion of UMTS

• Uplink expansion of UMTS

• Mobile network 4th generation

• Mobile network and 5th generation

• Max. transmission rate 384 kbit/s

• Max. transmission rate 7.2 Mbit/s

• Max. transmission rate 5.8 Mbit/s

• Max. transmission rate 10.000 Mbit/s

• 2014 about 300 million user worldwide

• Enables dataintensive services such as streaming

• Enables interactive services such as GoogleDocs

• Max. transmission rate 300 Mbit/s download and 75 Mbit/s upload

LTE

5G

• Enables shorter response times

Fig. 2.6 Mobile transmission standards and devices. Source: Wirtz (2010b, 2020b)

From a user perspective, mobile services comprise twelve fields of application, each of which covering specific domains. Tables 2.3 and 2.4 present these applications by providing typical examples and respective subfields, describing their benefits and advantages in m-business.

Brief Description

Source: Wirtz (2010b, 2020b)

Benefit/Advantage Mobile Business

• ...

• ...

• ...

• ...

• Mobile telephone marketing

• Location-based advertising

• In-app advertising

• Mobile display advertising • SMS codes

• Content-targeted inclusion

2

• Mobile Search Engine Marketing: e.g. Google Adwords

• Mobile coupons

• Competitions via mobile channels

• Contextual advertising

• Mobile search engine: e.g. Bing Mobile, Google Mobile, Baidoo Mobile

• Bluetooth marketing

• Advantage-supply side: Wide range of mobile direct marketing instruments; possibility of multichannel integration

• Advantage-supply side: Possibility of direct response and interaction

• Advantage-supply side: Transmission of personalized product and service information

• Advantage-supply side: Direct marketing through targeted information provision adapted to search behavior

• Portal subscriptions

• Benefit-demand side: Availability of advertising anywhere anytime

• Benefit-demand side: Direct communication channel

• Location-based applications and services for mobile advertising

• Permission-based marketing

• Mobile pull advertising

• Mobile push advertising

Mobile Advertising

• Benefit-demand side: Direct mobile information and knowledge relation

• Location-based applications and services for mobile communication

• Enables personalized address

• One-way or two-way communication between customer and supplier via a mobile channel

Mobile Communication

• Benefit-demand side: Access to information

• Location-based applications and services for mobile search

• Mobile knowledge management • Location-based applications and services for mobile information

• Mobile news

• Pull mechanism: Information request

Mobile Information

• Mobile use of search engines

Mobile Search

Fields of Application

46 Mobile Business

Table 2.3 Overview of mobile applications I

Instruments in Mobile Business

Brief Description

Source: Wirtz (2010b, 2020b)

Benefit/Advantage Mobile Business

• Mobile games for enhancing brand awareness and for product promotion • Viral direct marketing • ...

• Benefit-demand side: Quick, easy, and secure payment • Advantage-supply side: Efficiency of payment processing

• Mobile payment via near field communication (NFC) • Purchasing products and services mobile and doing direct payment with the same device, e.g. via PayPal • ...

• Benefit-demand side: Locationindependent online shopping

• Advantage-supply side: Additional distribution channel

• Mobile shopping-platforms, e.g. Amazon Mobile, Expedia Mobile, Newegg Mobile

• ...

• Shopping apps

• Mobile auction platforms, e.g. eBay Mobile

• Sponsoring and pre-/post rolls of mobile entertainment

• Location-based applications and services for mobile payment

• Basis for complex mobile services

• Advantage-supply side: New distribution channel for entertainment and/or linking entertainment with mobile advertising

• ...

• Complex instruments in telemetric & navigation

• Mobile browser: e.g. Opera Mini, Chrome

• Operation systems for mobile devices, e.g. Google Android, Windows Mobile

• Realization of respective fields of application and functions

• Mobile telemetry

• Mobile navigation

• Mobile browsing

• Mobile software

Supportfunctions

• Benefit-demand side: Usage of entertainment services anywhere and anytime

• Location-based applications and services for mobile entertainment

• Facilitates ubiquitous usage of entertainment

• Location-based applications and services for mobile commerce

• Multimedia entertainment offers such as music, videos or games for mobile devices

• Payment of products or services via mobile devices

• Mobile access to auctions

Mobile Entertainment

Mobile Payment

• Quick payment at point of sale or remote

• Mobile shopping: Mobile initiation and handling of shopping transactions

Mobile Commerce

Fields of Application

2.2 Applications and User Structure of Mobile Business 47

Table 2.4 Overview of mobile applications II

Instruments in Mobile Business

48

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Mobile Business

Mobile Software As an enabling technology, mobile software provides the foundation for various mobile application scenarios. In this regard, one can differentiate between operating systems for mobile devices and programs or additional functions. While operating systems ensure the technological operability of the device and are the basis of applications, programs or additional functions expand the scope of application of mobile devices on a functional level (Schadler et al. 2014). In the case of Apple’s iPhone, for example, the operating system iOS provides the basic functionality of the internal photo camera. The free app “Barcode Scanner & QR Code Reader” enables you to read barcodes and QR codes with the help of the camera function in order to retrieve information from the Internet. The interface between programs and operating systems may develop through an open or a proprietary system. Open systems such as Google’s Android platform aim to achieve the greatest possible participation of software developers that are supposed to gain additional platform users. In contrast, with a proprietary system like Apple’s App Store under iOS, Apple seeks to maximize control over the release of additional programs. Software developers have to register, and Apple reviews each new application according to internal standards, before releasing or denying the app. By ensuring a high quality of the applications, Apple intends to bind customers to its platform.

Mobile Browsing and Mobile Search Mobile Browsing Mobile browsing represents a further enabling technology for m-business applications by facilitating the navigation and use of World Wide Web offers on mobile devices. In this context, websites have become increasingly equipped with a responsive design in recent years, which adapts the display of the website to the screen format of mobile devices (Wei 2014). The progressive development of mobile processors and the improvement of interfaces, such as the development of highly sensitive capacitive multi-touch screens, have been a major contribution in this respect. Future developments in this area will accelerate the consolidation of standards in the field of mobile Internet and the stationary Internet usage. Meanwhile, for example, it is also possible to use flash content on mobile devices comfortably. Here, the goal is a seamless transition of content on different devices and platforms. This is particularly relevant in the context of mobile interactive Web 2.0 or social media offerings. Mobile Search Due to Google’s success, the business model of a search engine has profoundly shaped the image of digital business applications in the context of stationary Internet. In 2016, the aggregation of data, the provision of efficient search algorithms and context-specific promotional marketing of search results on the stationary Internet,

2.2 Applications and User Structure of Mobile Business

49

has reached a turnover of nearly 35.7 billion USD worldwide. The mobile Internet has also great potential in this respect. In May 2015, Google stated that mobile search queries surpassed desktop queries for the first time (Google 2015a). In 2017, the mobile traffic accounted for 57% of the total Internet traffic in the United States (Sterling 2017). With about 94% market share (StatCounter 2018) and an estimated net mobile advertising revenue of nearly 50 billion USD (Statista 2016b), Google clearly dominates the global mobile search engine market. The high relevance and growth rates of mobile search lead competitors in the search engine market to ensure comprehensive mobile usage of their services. In doing so, they not only optimize existing search engines for mobile devices but also make cooperation agreements with manufacturers of mobile devices. In 2012, Google paid Apple 1 billion USD to be default iOS search engine and another 1 billion USD in 2014 to keep its search bar on iPhone (Bloomberg 2016). Their competitor, Microsoft, by contrast, directly integrated their search engine Bing into their own mobile operating system, Windows Mobile. Hence, both the mobile platforms and the search engines of Google and Microsoft are in direct and interconnected competition.

Mobile Information, Mobile Entertainment, and Mobile Navigation Mobile Information Mobile information refers to all kinds of mobile information services in the mobile Internet. These are content offerings that primarily cover information regarding news and knowledge (Moatti 2016). While mobile news offerings provide information about current events of the day in the form of text, photo, audio, video, or multimedia productions, knowledge offerings provide, mostly by means of databases, accumulated knowledge with regard to specific topics that rarely focus on current events. These include, for example, online encyclopedias such as Wikipedia or specialized expert knowledge offers such as health.com in the area of health and medicine. Wikipedia as a mobile knowledge offer and the New York Times Mobile as a mobile news offer, for instance, have structural similarities. More specifically, both mobile offers emphasize the internal search function, related links, and a central presentation of content. However, the presentation of content differs in some respects. While mobile news offers increasingly use multimedia elements and teasers, knowledge offers have a rather slim design and confine themselves to essential information elements with regard to a specific topic. Instead of giving an overview of various current topics, they present in-depth knowledge. Mobile Entertainment Mobile entertainment consists of the service categories mobile music, mobile video, and mobile games. In relation to the acceptance of paid content, these subfields of application have the highest potential in the stationary Internet and thus should be strongly considered when looking at mobile entertainment services (Wei 2014).

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The category of mobile music comprises all music-related, mobile and digital products and services. This, for instance, includes downloading and streaming music titles, as well as other services such as ringtones or song recognition. The largest online music stores like Amazon MP3, Apple’s iTunes, or Google Play offer products of many different music labels and offer them to users in a DRM-free MP3 format. Here, users cannot only buy music albums; they can also purchase singles at a low price. Other companies such as Pandora Internet Radio, Spotify, or Rhapsody offer the opportunity to stream music for a monthly fee. The global music market has reached a breakthrough in 2015 as digital became the main revenue stream for recorded music. Consequently, digital music has overtaken sales of physical formats. While digital revenues now account for 45% of total revenues, physical sales amount to 39%. The trending desire among consumers to access cloud-based streaming services anytime and through any device makes streaming the industry’s fastest-growing revenue source with revenues increasing 6.6 billion USD in 2017 (McIntyre 2018). However, when distributing their products, especially, the providers of mobile music need to consider the accessibility of sufficient Internet bandwidth, as well as the restrictions of data volume typical for mobile communication contracts and prepaid plans. Another category of mobile entertainment is mobile video. This category refers to video-based content offers that provide entertainment, taking account of the technical and environment-related restrictions of mobile video adoption. Examples in this context are the use of YouTube by means of an Apple iPhone or the use of mobile TV content via DVB-H. The value capture within the revenue model of the offers mostly occurs through promotional marketing or paid content. Furthermore, the category of mobile games is characterized by mobile, interactive, and digital entertainment offers. The interfaces and gaming mechanics of the respective games are adapted to the factors of the mobile context of use, which particularly include relatively small input and output devices, lower computing power compared to PCs, as well as shorter intervals of use that are often interrupted by distractions. This sector generates revenue by means of one-time payments, subscription contracts, or pop-up advertisements.

Mobile Navigation The business field of mobile navigation consists of the two segments, location determination and route planning (Turban et al. 2015). Both aspects require that the terminal device has the technological capability to process information for location determination. The current generation of mobile communications devices achieves this by combining GPS technology, fast mobile processors, and, to some extent, hardware and software to analyze WLANs. One critical component of all business models in this area refers to the access to preferably up-to-date maps. Access to maps can be licensed by respective publishers or may stem from own resources. Additional information enriching the maps, such as specific points of interest or photo-realistic representations of single locations, may create a competitive advantage. In the segment of mobile route planning,

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monetization usually takes place by means of license fees paid by the device manufacturer, one-time payments for updates of maps or subscription models.

Mobile Commerce, Mobile Communication, and Mobile Payment Mobile Commerce Mobile devices enable time- and location-independent transactions that are especially relevant in the context of mobile commerce. In particular, the introduction of UMTS technologies—the mobile communications standard of the third generation—and the much higher associated transmission rates have facilitated mobile shopping applications (Turban et al. 2015). The travel industry is an early adopter in this context. The establishment of online bookings of flights and travels has fostered its early entrance in this m-business area. WAP-enabled mobile phones have allowed to access flight and railway schedules as well as to make ticket reservations for quite some time. Continental Airlines (now United) was the first US airline that offered mobile booking of flight tickets, allowing customers to select, book, and pay a flight by means of a mobile phone. Today, customers of almost all major airlines can conveniently book their flight ticket via their mobile phone. Moreover, most airlines offer their customers to check in on the go and to obtain information about departure and arrival times, flight schedules, as well as their individual mileage account. Another example of the field of m-commerce is the mobile shopping platform of Amazon that allows customers to order products on the go by means of their mobile phone. In addition, Amazon offers services like information about the customer account and the status of an order, as well as notifications with regard to delivery or products. Since the year 2007, the QR code has become more and more established as a standard solution for mobile shopping (Ryu 2013). Already in 1994, the Japanese company Denso developed the code that enables to directly look up a product on an Internet address or obtain further information, such as shipping or address data (Denso 2014). Furthermore, mobile auctions play a special role in m-commerce (Wei 2014). Their time-critical component makes them an ideal basis for a mobile application, allowing users to make location-independent bids. In this regard, revenue is generated through fees charged from the seller for putting the auction online, as well as commissions on the achieved price. The opportunity of localizing mobile phones has facilitated the introduction of innovative applications that have recently gained acceptance in the Internet. For instance, when travelers want to visit a restaurant, they can now obtain information about their environment and often have the possibility to make reservations online via their mobile phone. These potentials require an inter-connection between mobile commerce applications and location-based services (Li and Du 2012).

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Mobile Communication Mobile communication summarizes different communication-based services that contain text, audio, and video material. Here, the adaption of interfaces and terminal devices to the mobile context of use plays a decisive role. Mobile communication represents a core area of m-business, and its revenue potential is primarily realized through user fees charged by mobile communication providers. In this context, dataand time-dependent per-usage tariffs have been most widely replaced by flat rate packages that vary in their amount of fixed anytime minutes, messaging or amount of transmitted data. The subfields of mobile communication are email, mobile instant messaging (MIM), chat applications, and public short messages. Instant messaging services operate similar to communication via email. While email is usually used for communication between two persons, instant messaging services offer the possibility to communicate with several persons at the same time, like in a chat room (Martin 2013). Special notification services show registered users the online status of their contacts or other users. There are also extended versions of this concept that contain multimedia components like audio and video chat, which sometimes can be used simultaneously, as in the case of Skype. Mobile Payment Financial services are among the pioneers of m-business applications (Turban et al. 2015). Already in the year 1992, the Finnish-Swedish company Merita Nordbanken offered a service to pay bills via GSM in Europe (SCN Education B.V. 2000). Besides the emergence of pure online banks in Europe and North America, a variety of established financial service providers have developed their own online applications for Internet banking and online broking and trading services. The financial service providers are thus in a starting situation, in which the offer of mobile banking often only represents a further development of the online applications. For financial service providers, mobile banking is an additional distribution channel that creates new revenue models and reduces costs associated with financial transactions. Customers can use mobile devices to check their account balances, to transfer money, to obtain information about stock prices and interest rates, as well as to buy and sell stocks. Besides mobile banking and mobile broking, there are two other mobile financial services: mobile cash and mobile payment (Lerner 2013). Mobile cash and mobile payment applications comprise mobile payment processes with regard to all kinds of cash machines (e.g., drinks machines), the payment of a person or entity that represents a retailer or service provider (e.g., restaurant, taxi, shopping mall), as well as the transfer of money between two end customers. There are various providers that support mobile payment, enabling people to pay all kinds of products or services via their mobile phone, for instance, tickets for public transportation, movie and concert tickets, car toll, as well as lottery and bets. Popular payment systems are PayPal, Amazon Pay, and Google Wallet. The significant diffusion of mobile devices and the increasing importance of e-commerce indicate a high sales volume with further growth potential for mobile payment

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(Allums 2014). While the number of mobile payment users in the United States amounted to 16.4 million in 2014 and to 55 million in 2018, they are expected to reach 74.9 million by the year 2022 (Statista 2018). Similarly, the mobile payment transaction value in the United States is assumed to rise from 27.67 billion USD in 2016 to 189.97 billion USD in 2021 (Statista 2016a).

Mobile Advertising and Mobile Telemetry Mobile Advertising Mobile advertising refers to the application of mobile devices, such as mobile phones or tablets, as advertising media. Mobile advertising introduces a new channel to address target groups in the context of advertising communication, enabling a more intense and efficient performance by means of an integrated communication (Rowles 2013). In this regard, mobile devices not only are passive advertising media but also offer a basis for interactive advertising content by means of their interaction potential. The advancement of mobile devices and the opportunities of localization and identification allow to unlock new potentials in the field of one-to-one marketing. Advertisers using location-based advertising have a locational advantage over competitors since they can reach customers on site and send them personalized advertisements (Dushinski 2012). Mobile advertising is increasingly gaining acceptance as an innovative marketing tool since it offers the opportunity to address potential customers individually (Bart et al. 2014). Although the market share of mobile advertising in the total revenue of the advertising industry is still moderate at present, it is expected to reach the dimension of non-mobile Internet advertising soon due to its exceptional rates of growth. In the United States, for instance, mobile advertising accounts for about 57% of Internet advertising revenue with a year-onyear growth rate of 36% in 2017 (Marketing Charts 2018). Mobile Telemetry Mobile telemetry represents another m-business area with high potential. Telemetry applications enable the mobile transfer and processing of measured data. In this regard, different systems have established themselves in the market, particularly with regard to navigation and fleet management, traffic information, road condition and weather information, roadside assistance and breakdown (eCall), as well as advanced driver assistance. The goal of mobile telemetry application is the automatic adaption of services, processes, and objects to a specific context. For instance, network technologies enable to monitor measured data of industrial facilities and to send them to a maintenance center. The mere monitoring function can be extended depending on the property of the device in order to enable interventions by means of remote maintenance. Mobile telemetry is particularly relevant in the healthcare and automotive industry. Mobile car-to-car communication and technologies for mobile health checks are the major drivers of technological advancement in this area.

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User Groups in Mobile Business With respect to the diffusion of Internet-enabled mobile phones and other mobile devices and the respective increase of mobile application offers, the market has reached a certain maturity in recent years (Swilley 2016). In 2017, an international comparison2 showed that overall more than 25% of Internet users are mobile-only Internet users. In the age group between 25 and 34 years, this pertains to even almost one third of users. A major proportion of mobile usage time refers to the use of apps, accounting for more than 80% of the time. In addition, so-called on-the-go categories, such as weather, communications, or job search, also tend to be used often mobile-only. In particular, socially motivated purposes, for instance, the use of instant messengers or social media, account for more than 25% of mobile usage time. However, it is not expected that desktop usage will be discontinued in the future (comScore, Inc. 2017b). Figure 2.7 illustrates the average usage of mobile-only Internet. Usage in percentage 29%

28% 28%

27% 26% 26% 25% 25%

24% 24%

23%

22% 18-24*

25-34

35-44

45+

* Ages 15-24 in Brazil, China, India, Italy, Malaysia, Spain and UK

Fig. 2.7 Average usage of mobile-only Internet. Data source: comScore, Inc. (2017b)

2 Encompassing the countries Brazil, Canada, China, France, India, Italy, Malaysia, Spain, the United Kingdom, and the United States.

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Overall, expert surveys assume that the diffusion of broadband-enabled mobile devices worldwide will increase in the future (eMarketer 2016). In the United States, for instance, the number of adults owning a smartphone has more than doubled from 35% in the year 2011 to about 81% in the year 2019 (Pew Research Center 2019b). This trend is expected to continue. The growing enthusiasm for data-intensive mobile applications is a driver of this development. In particular, the time- and location-independent retrieval of important information is in the focus of interest (Hayden 2013). Besides understanding the dissemination of technical conditions, knowledge about the use of mobile services is indispensable for a more precise assessment of potentials and risks of business activities and applications in m-business. While there is a high proportion of usage of traditional communication services, such as telephony, with regard to these mobile services, mobile Internet usage is also becoming increasingly important. The growing mobile app industry also fosters usage of mobile apps to the disadvantage of browsers. Meanwhile, apps already account for 90% of the time spent on the mobile Internet, while browsers only amount to 10% in this respect. With regard to the usage of apps, users spend most of their time on Facebook and messaging and games apps. While the overall usage of communication and entertainment mobile services is quite high, news apps and other information apps lag behind and are far from being fully exploited in terms of use. This becomes also apparent when looking at different app categories. Figure 2.8 reflects this divergence by illustrating the share of mobile app categories and individuals’ time spent on these apps in the United States.

Instant messengers

3%

Retail

3%

Search and navigation

3%

News and information

3%

Maps

3%

Photos

4%

Multimedia

10%

Games

10%

Music

18%

Social networking

20%

All others

23% 0%

5%

10%

15%

20%

25% Time Spent in %

Fig. 2.8 Share of time spent according to mobile app category. Data source: comScore, Inc. (2017a)

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The time spent on different mobile apps or their intensity of use corresponds to the distribution of mobile offers in general. Based on categories, social networking is the most frequently used app offer within the mobile Internet followed by radio and games. Interestingly, individuals still do not use mobile music as much as radio despite the growing success of mobile music apps, such as Apple Music and Spotify. The least used category represents news and other informational mobile app services. When observing mobile user groups and behavior, the identification of different user types in terms of a mobile user typology is an interesting perspective. While Section 1.3 presents the user structure of the digital society in general, this section categorizes and describes the existing types of mobile users based on a classification of the Pew Research Center (see Fig. 2.9). Figure 2.9 reveals that the different types of mobile Internet users are evenly distributed. The digital collaborators with a share of 20.5% have the most mobile tech assets and use them to work and share their creations with others. They are especially confident and adept in coping with digital devices and information.

Mobile Newbies 20.50%

Digital Collaborators 20.50%

Ambivalent Networkers 19.00%

Roving Nodes 23.10%

Media Movers 19.00% Fig. 2.9 Types of mobile Internet users. Data source: Pew Research Center (2009)

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Digital collaborators are mostly male (56%) in their late 30s and well educated. The ambivalent networkers (19%) use their mobile devices to support their social life, whether by means of instant messaging or social networks. They also rely on the mobile Internet when it comes to entertaining content and applications. However, they also have concerns about connectivity. Some of the members of the ambivalent networkers group regard mobile devices as intrusive. Ambivalent networks are primary young (late 20s) male (60%) and ethnically diverse. The media movers with a share of 19% have a wide range of mobile device and mobile Internet habits, including the creation and sharing of content. These social exchanges are central to this group. Media movers are mostly male (56%) in their mid-30s and have many children as well as a middle income. The user group of roving nodes represents 23.1% of mobile Internet users and is characterized by a high usage intensity. Roving nodes actively manage their social and work life by means of mobile devices. They get the most out of basic applications such as email or texting and preferably use them to arrange the logistics of their lives and enhance personal productivity. Roving nodes are mostly welleducated women (56%) in their late 30s. Finally, mobile newbies (20.5%) have the lowest mobile tech assets but are fascinated by mobile devices. Many of them have acquired a mobile device in the past years and like how the device helps them to be more available to others. They are mainly male (55%) in their 50s with a lower educational background and income level. Having explained the applications and user groups in the field of m-business, the following section discusses success factors of m-business.

2.3

Success Factors of Mobile Business

The future development of m-business depends on whether companies can successfully realize the potential opportunities mentioned. M-business is not to be viewed isolated but rather needs to be integrated in a general strategic framework in order to be successful. This strategy should take into account the most important success factors of m-business, which are described in the following section. Mobile phones are not only widely used; they are also easier to handle than desktop PCs. The inhibition level with regard to the use of devices is therefore lower among users in m-business. Moreover, the cost of purchase of a device is much lower and it saves time compared to a desktop PC. The success factors of m-business are similar to those of digital business. Nevertheless, it is important to consider the specific characteristics of m-business, including mobility, accessibility, localization, and identification (Bhatti 2007). The characteristics accessibility and mobility or location independence become relevant to success in connection with time-critical information (Kourouthanassis and Giaglis 2012). Particularly in the field of mobile financial services, it is essential for the user to obtain information in real time and to be immediately able to perform transactions from anywhere. However, these factors are not only crucial to success in the context of financial services. Real-time information

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is also an additional benefit to the user in other domains where up-to-datedness is critical, such as in the news area. The key success factors of m-business can be classified into four categories.

Customization and Mobile Networking The first key success factor is customization and mobile networking that comprises different important aspects. To begin with, mobile social networking between users involves that users cannot only communicate with each other via their mobile devices; they can also share their locations within their social network. Further aspects pertain to the localization of offers and preferences, as well as to the selection, personalization, and individualization of services and products (e.g., apps) toward the mobile preferences of users. While personalization captures individual adaptions to the user structure, localization refers to location-based adaptions of services (Zhou 2013). The personalization and localization of products and services allows to satisfy customer demands more goal-oriented and thus to increase customer satisfaction (Nilashi et al. 2015). A good example incorporating mobile networking, location-based services, and customization is the mobile app Foursquare. Foursquare is a location-based recommendation service for restaurants, shopping centers, and other places, which shows its users respective places they like based on the places they go and the things they or their friends like. The companion app Swarm by Foursquare further allows users to connect with their friends and share their locations as well as to check in to a location and see who of their friends is close by.

Absence of Media Disruption and Seamless Connection Another success factor of m-business is the absence of media disruption and seamless connection. In this regard, the handling of complex inter-connected information processes and services takes place via a central mobile device (usually with cloud option) without having to switch between different devices or media. This time- and location-independent availability of services is supposed to lead to more convenience and time saving for the user. Moreover, the software platform and integration degree are also success factors of m-business. Most important in this context are mobile apps (e.g., WhatsApp, Snapchat, or Uber) that nearly all online providers offer for their products or services via digital marketplaces. The width and depth of the app offer and the overall attractiveness of an app service play a crucial role in this context.

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Software Platform and Integration Degree Furthermore, the provision of a market for the goods and services of third parties that extend mobile products and services by functions and content increases the attractiveness of the initial products or services. Here, providers particularly apply interconnected proprietary platforms that offer them the advantage of high controllability. In addition, a large supply of available value-added services may lead to a lock-in effect that permanently binds customers to devices, services, and the platform of a certain manufacturer. A good example of such an inter-connected system solution is the cloud storage and cloud computing service iCloud from Apple. This service not only allows users to store data such as documents, photos, apps, contacts, and more on remote servers but also synchronizes the data and keeps them up to date on all the user’s devices (e.g., iPhone, iPad, and MacBook).

Bandwidth Finally, the available bandwidth represents a crucial component of m-business, as it is a requirement for content services, such as mobile video streaming, and thus restricts the range of usage of m-business applications. Here, the stability and performance of connection (e.g., bit rate) and the area of coverage are particularly important. Figure 2.10 presents an overview of the four basic success factors of m-business.

Customization and Mobile Networking

Absence of Media Disruption and Seamless Connection

• Mobile social networking between users (e.g., Swarm)

• Universal time- and location-independent availability of data

• Location-based offers and preferences (e.g., Foursquare)

• Redesign of processes and information chains (e.g., multi-channel services)

• Selection, personalization and individualization of services and products (e.g., apps) towards mobile preferences

• Resource and time savings through the use of central mobile device with cloud option

Software Platform and Integration Degree

Bandwidth

• Width and depth/customization of app offer/ attractiveness of app service

• Stability of connection

• Interconnected system solutions (e.g., Apple iCloud)

• Area of coverage and range

• Performance of connection (e.g., bit rate)

• Digital marketplace for software-based extensions

Fig. 2.10 Success factors of mobile business. Source: Wirtz (2010b, 2020b)

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Another type of digital business closely connected to m-business is social media business. The following section describes the basics, applications and user groups, as well as success factors of social media business.

2.4

Summary

• The establishment of the smartphone has caused a continuous development of mobile business toward an important digital business area for various companies. • Mobile business can be defined as the initiation as well as the partial and full support, transaction, and retention of service exchange processes between economic partners by means of electronic networks and mobile devices. • Meanwhile, mobile business with its mobile offers, services, and applications is increasingly displacing digital services solely based on stationary Internet technologies. This is primarily due to the continuous technological development that has not only enabled mobile Internet but has also increased its attractiveness for users through the continuous progress in terms of Internet speed. • Mobile business market leaders such as Apple and Google are pursuing integrated market strategies by providing appropriate platforms that are usually only accessible with their devices or at least with their operating systems. Accordingly, their market strategies are based on proprietary systems. • The platforms of these mobile business market leaders bring third-party providers of mobile applications or other digital mobile contents together with the end consumer. • Due to the substantial improvements in mobile hardware and software, many consumers are using mobile applications to an ever-increasing extent. In some countries the average use of mobile-only Internet amounts up to 28%. • Users dedicate most of their time to social networking (20%), music (18%), and gaming applications (10%). • The activities of mobile business are mobile search, mobile information, mobile communication, mobile advertising, mobile commerce, mobile payment, and mobile entertainment. • The user structure of the mobile business can be divided into the following five groups: mobile newbies, roving nodes, media movers, ambivalent networkers, and digital collaborators. • The success factors of mobile business are customization and mobile networking, absence of media disruption and seamless connection, a software platform and a high integration degree, as well as adequate bandwidth.

2.4 Summary

Chapter 2 Questions and topics for discussion

Review questions 1. Define mobile business. 2. Describe integrated mobile applications and illustrate their advantages. 3. Describe the different mobile transition standards and devices.

4. Outline Apple’s integrated mobile business strategy. 5. Identify success factors of mobile business.

Topics for classroom discussion and team debates 1. In the last decade, mobile Internet has clearly overtaken stationary Internet access. Discuss whether every Internet access will be mobile in the future. What would be the advantages and disadvantages of such a scenario? 2. Almost every young person today has a smartphone. Discuss whether the intensive use (always on/always in) is useful for personal development, especially against the background of online addiction/gaming addiction. 3. Discuss the advantages and disadvantages of the competitive strategy in the form of digital wallet gardens. Will proprietary systems such as the Apple ecosystem undermine the open and compatible standard of the Internet?

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Contents 3.1 Basics of Social Media Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Web 2.0 vs. Social Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Social Media and Social Media Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Media Four-Factor Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Applications and User Groups in Social Media Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Media Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Media Microtargeting and Social Media Multiplier Effects . . . . . . . . . . . . . . . . . . . . . Social Media Convergence and Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . User Groups in Social Media Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Digital Disinformation on Social Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . News Consumption on Social Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Integrated Model of Digital Disinformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Governance of Digital Disinformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Success Factors in Social Media Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appropriate Handling of Data Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Four-Factor Model and Social Media Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Potential of Various Social Media Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64 66 67 68 71 71 76 78 80 83 83 85 89 90 90 91 92 93

Learning Objectives By working through this chapter, you will be able to: 1. Define and distinguish social media and Web 2.0. 2. Explain the components of the Social Media Four-Factor Model. 3. Describe types of social media applications, as well as the different groups of social media users and their activities. 4. Explain the issue of digital disinformation and potential governance mechanisms. 5. Describe the success factors of social media business.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_3

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3 Social Media Business

Due to the increasing acceptance and growing commercial use and dissemination of the Internet, online marketing has become a key success factor for companies. Social media plays an important role in this context (Aral et al. 2013; Wirtz and Ullrich 2008), consisting of innovative platforms and applications with high potential to shape the future of the Internet. Users and providers collectively define and shape the content through collaborative participation and thus determine the development of social networks (Turban and Sipior 2015). The purpose of social media applications is the distribution of content and the networking among users (Xiang and Gretzel 2010). This chapter outlines the opportunities for companies to use Web 2.0 or social media technologies for commercial reasons. Section 3.1 explains the basics of social media business by providing a general understanding and definitions, as well as presenting an explanatory model of social media (Social Media Four-Factor Model). Subsequently, Section 3.2 outlines the current setup of the social media world including a differentiation of user groups and applications. Moreover, it presents the use of these applications for the private sector. In Section 3.3 news consumption on social media and the issue of digital disinformation are explained, as well as possible governance measures. Finally, Section 3.4 discusses success factors in social media business.1

3.1

Basics of Social Media Business

The increasing importance of social media business is determined by a fundamental increase in users of social media and Web 2.0 applications. Both customer and corporate sides have significantly contributed to the increase in attention on social media in recent years (Laudon and Traver 2017). In this context, particularly the increasing amount of advertising financing with regard to popular social networks such as Facebook is a reliable indicator for the rising significance of social media. Therefore, the rapid economic development of social media is also reflected by the growth of their advertising revenues in the United States in recent years. Figure 3.1 illustrates this development.

1

See for the following chapter also Wirtz (2020b).

3.1 Basics of Social Media Business Ad revenue in $ billion

65

CAGR* 37.42%

40

35,6 35 28,9

30 25

22,1

20 16,3

15 10,8 10 5

7,0 4,5 2,8

0 2012

2013

2014

2015

2016

2017

2018

2019

* CAGR: Compound Annual Growth Rate

Fig. 3.1 Development of social media advertising revenue in the United States. Data source: IAB/PwC (2020)

Social media advertising revenues in the United States have grown steadily from 2.8 billion USD in 2012 to 35.6 billion USD in 2019. This increase is characterized by a compound annual growth rate of 37.42%. While social media accounted for approximately 14% of total Internet advertising revenues in 2014, their respective share already increased to 28.6% in 2019 (IAB/PwC 2020). The trend of rising social media advertising revenues is assumed to continue, reaching a market volume of about 66.2 billion USD by 2023 in the United States (Statista 2019b). In terms of revenue, the most preferred social media platforms by marketers in 2020 were Facebook (94%), Instagram (76%), LinkedIn (59%), Twitter (53%), and YouTube (53%) (Social Media Examiner 2020). This is also reflected in Table 3.1 that presents the most frequently used social media services in the world. As shown in Table 3.1, particularly social networking websites have gained popularity. In 2019, the number of social media users worldwide amounted to 2.95 billion, which is assumed to reach 3.43 billion by 2023, thus representing one third of the world population (Statista 2020i). Given the widespread dissemination of social media, it has become increasingly relevant in the context of digital business. Digital business-oriented social media use is referred to as social media business in the following. Before outlining the specific characteristics of social media business, the following presents the essential features of social media.

66 Table 3.1 Most frequently used social media services in the world

3 Social Media Business

Platform Facebook YouTube WhatsApp FB Messenger Weixin/WeChat Instagram Douyin/TikTok QQ Qzone Sina Weibo Reddit Kuaishou Snapchat Twitter Pinterest

Activity in % 17.2 13.8 13.8 9.0 8.0 6.9 5.5 5.0 3.6 3.6 3.0 2.8 2.7 2.7 2.5

Data source: We Are Social (2020)

Web 2.0 vs. Social Media When investigating social media, one often comes across the term Web 2.0. Since both social media and Web 2.0 are relatively young fields of research, there is no clear demarcation between these two terms. In the academic literature, both terms are frequently used with similar meaning. Most definitions of social media and Web 2.0 combine characteristics such as interaction, dialogue, networking, and usergenerated content. The focus of interest within social media and Web 2.0 is the exchange of information, experience, and perspectives in online communities (Wirtz and Elsäßer 2012a). Against this background, this section first discusses the differences between Web 2.0 and social media. The heart of Web 2.0 is the communication or interaction between Internet users (O’Reilly 2005; Little 2007). It uses basic functions that allow the user to continuously contribute and modify web content. Web 2.0 technologies are, for example (Kaplan and Haenlein 2010): • Adobe Flash: common method for programming and displaying multimedia and interactive content, such as animations, audio, and video streams • RSS (Really Simple Syndication): a web feed format for simple and structured publication of consecutive changes on websites • AJAX (Asynchronous JavaScript): a technique for obtaining data on web servers to update web content without altering the layout and operation of the website Social media, by contrast, is a group of Internet applications, technically and ideologically based on Web 2.0. They allow to post and exchange user-generated content. Attributes of user-generated content are as follows:

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• It is published on social media platforms. • It contains a degree of creative personal contribution. • It is created outside of professional routines and practices (Kaplan and Haenlein 2010). Figure 3.2 compares the characteristics used in the literature and gives respective examples (content adapted from Kaplan and Haenlein 2010).

Web 2.0

Social Media

Characteristics

• Users can continuously contribute and modify web content

• Group of Internet applications based on Web 2.0

• Diverse basic functions allow the use of the Web 2.0 (see examples)

• Allows creating and exchanging usergenerated content

• Ideological and technological basis for social media

• Adobe Flash Examples

• RSS (Really Simple Syndication)

• AJAX (Asynchronous Java Script)

• Social networking (e.g., Facebook)

• Video sharing platforms (e.g., YouTube) • Wikis (e.g., Wikipedia)

Fig. 3.2 Web 2.0 vs. social media. Source: Wirtz (2020b)

Definition of Social Media and Social Media Business Against this background, the term social media comprises different features and aspects and is thus defined as follows. Definition of Social Media (Wirtz and Ullrich 2008; Wirtz 2016b, 2020b) Social media are applications, services, and platforms on the Internet with high, mostly interactive and personalizable creative potential. They are characterized by the active generation and creation of diverse content through the cooperative participation of users. User-generated content in conjunction with platform services forms social networks that enable users to network in a communicative and content-related way. Based on the definition of digital business in Chapter 1, it is possible to derive a definition of social media business.

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Definition of Social Media Business (Wirtz 2013a, 2018b) The term social media business describes the initiation as well as the support, management, and maintenance of transactions between economic partners via social media tools.

Social Media Four-Factor Model A suitable approach to explain the characteristics and the opportunities in digital business through social media is the Four-Factor Model (Wirtz et al. 2010b). This is one of the few integrated models of social media, which is empirically validated (Wirtz et al. 2013). The four dimensions of the model are: • “Social networking”: networking of groups and individuals via Internet platforms and applications • “Interaction orientation”: interactions between companies and users on social media applications • “Customization and personalization”: segment-specific alignment and adjustment of the market offers to the needs of users or user groups • “User-added value”: value created for and by users on social media platforms The four dimensions of the Social Media Four-Factor Model are each composed of several components. Figure 3.3 illustrates these dimensions and their components (content based on Wirtz et al. 2010b). Interaction orientation represents the ability to effectively manage the demand of the general public for more intense and more authentic two-way communication businesses (Rayport et al. 2005). This factor manifests itself in four important subfactors: user centricity, interaction configuration, user response, and cooperative value generation. User centricity puts users at the center of attention and orients business activities toward the users. This brings along a major paradigm shift for many businesses, which requires a strategic and operative reorientation toward users. Interaction configuration particularly refers to the structure of the interaction process, focusing on the content of the information exchanged and the interaction partners involved, as well as the reasons and motives underlying the interaction. User response describes a company’s capacity to manage the dialogue with the customer, especially referring to its ability to react appropriately to user requests or feedback in order to establish sustainable relationships to users and thus to achieve customer loyalty in the long run. Cooperative value generation is closely connected to this component and reflects a company’s ability to integrate users into the respective business processes in order to cooperatively create value. For instance, the company may improve products or services according to the respective user feedback (Wirtz et al. 2010b).

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Interaction Orientation Cooperative value generation

User-generated innovation

User-generated contacts

Personal customization

Virtual word of mouth Social identity

Social Networking

Social trust

Social customization

User-generated content

Group customization

Social Media

User-generated creativity

Customization/Personalization

User response

Interaction configuration

User power

User centricity

User-Added Value Fig. 3.3 Social Media Four-Factor Model. Source: Wirtz (2020b)

The factor customization and personalization refers to the possibility for users to customize websites, applications, and online offers to their needs and preferences. It is composed of the subfactors personal customization, group customization, and social customization. Personal customization gives users the opportunity to reconfigure a portal or website to their particular needs and preferences. For instance, Facebook users can select whether they would like to receive email notification when there is a status change or a new post on a Facebook fan page. Group customization enables a group of individuals connected through the Internet to design, build, or reconfigure platforms, products, services, and so on. Businesses may, for example, consult customers when naming new products. Suggestions are subject to ratings by other users and an official jury that finally decides. Social customization refers to customized products or services that are primarily offered to distinct social layers.

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User-added value describes value creation through the involvement of users that contribute content, creativity, innovation, and contacts which thus adds value through new information and innovation. Accordingly, this concept comprises various phenomena, including user-generated content, user-generated creativity, as well as user-generated innovation and user-generated revenue/contacts. Usergenerated content covers various content types including profiles, video or audio files, as well as other website contents (e.g., recommendations or reviews). In the same way, users can participate through user-generated creativity, contributing a completely new perspective and bringing in innovative ideas for the further development of companies. In the context of user-generated innovation, this is how they become a critical part of product and process innovations. This kind of user involvement has been strongly facilitated through open-source programs and APIs (application programming interfaces) (Wirtz et al. 2010b). User-generated revenue/ contacts describes the possibility of expanding the range of service offers through new user contacts and the resulting added value (Goh et al. 2013). Companies can benefit from active users in various ways, for instance, through user recommendations of interesting fan pages on Facebook. This kind of ability to attract and benefit from new users has become an important value driver for companies in the field of digital business. Social networking describes structures of online interactions among individuals and consists of the four subfactors: social identity, social trust, digital word of mouth, and increasing user power. Its underlying concept is the connection of individuals and social groups via online applications and platforms that are often based on certain topics (Beynon-Davies 2013). User participation in social networks is mainly driven by the search for social approval and the desire for group membership. Social networks are of vital importance since the information put online in these networks becomes a trusted source of knowledge for various personal decisions. The subfactor social identity refers to the users’ desire to belong to specific social groups and to manage their image in particular online environments. This can be addressed, for instance, by means of specific company channels on YouTube or fan pages on Facebook. Social trust is similar to social identity as it builds upon the behavior of people, who believe that beneficial behavior in their interactions with others will conversely lead to beneficial behavior toward them. This underlying belief creates confidence in the information provided by other users. Examples are wiki projects and collaboration projects. Digital word of mouth is also closely related to the two above-mentioned subfactors but rather refers to informal information exchange between users through email, blogs, review websites, and so on. Increasing user power is a result of rising interaction through social media, since it creates transparency and user opinions become ubiquitously available. In this connection, users act as multipliers, for instance, by sharing and linking a company’s fan page on Facebook they have liked (Wirtz et al. 2014). To sum up, the Social Media Four-Factor Model provides a clear conceptual guidance as well as the key characteristics for using and adapting suitable social media applications. The performance of social media business is based on various social media applications that involve social media users. These applications enable

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the fulfillment of the respective challenges regarding the factors of the different dimensions of the Social Media Four-Factor Model to meet the requirements of the users involved. Therefore, the following chapter presents the relevant applications and the involved user groups of social media business.

3.2

Applications and User Groups in Social Media Business

Social media has become a fundamental part of modern information society. This development has massively changed individuals’ everyday life and thus significantly changed the entire economy (Richards 2014). Against this background, this chapter first presents different social media applications to give an overview of various fields of digital business via social media. Next, user groups in social media business are presented and analyzed.

Social Media Applications Social media offers companies a variety of applications to communicate with customers and other stakeholders (Dahnil et al. 2014). From a channel perspective, there are several social media applications that have to be taken into account (Scott 2015). These are presented in Table 3.2 (content based on Enderle and Wirtz 2008), showing the respective application’s business model, service offer, and user value. Social networking refers to platforms that use computer-mediated communication to link individuals in groups or communities, so-called social networks (Laudon and Traver 2017). Examples of social networking sites are Facebook, Twitter, or Instagram. The business model of social networking includes the compilation and provision of user-generated content on a single platform, generating revenue based on ad sales and data mining. The service offer provides the opportunity of selfpresentation for the users, as well as networking among users and between users and content. Thus, users can basically present their profiles on the web and interact or network with other users. In particular, the mediation of social contacts through digital interaction and the high suitability for use in the mobile environment provides value to the user. These social media applications can be quickly and easily set up to start interaction and thus are highly relevant within a digital business setting (Scott 2015). Due to their scope and growth in recent years, social networks are among the most popular applications in the social media business (Beynon-Davies 2013; Wamba and Carter 2014). One of the world’s most popular social media applications is WhatsApp with around two billion users in April 2020. With approximately 2.5 billion users, Facebook, the company that owns WhatsApp, has even a larger user group on its original network (Statista 2020f). Instagram, also owned by Facebook, has about one billion active users (Statista 2020f). The business network LinkedIn has 690 million active users (LinkedIn 2020). Blogs and RSS feeds provide online publishing opportunities for businesses and organizations and enable visual presentation of content (Laudon and Traver 2017).

3 Social Media Business

72 Table 3.2 Overview of social media applications Application Social Networking, e.g., facebook. com

Business Model • Compilation and provision of usergenerated content on a single platform • Revenues through ad sales/data mining

Service Offer • Self-presentation of the user • Networking among users • Connection between users and content

Blogs & RSS Feeds, e.g., blogger.com

• Systematization and compilation of online diaries • Revenues through ad sales/usage or subscription fees/data mining • Compilation and provision of usergenerated content on a single platform • Revenues through ad sales/data mining

• Provision of an authoring tool for the creation of blogs • Hosting of blogs • Categorization of blogs • Special type of blogging to quickly publish short messages

• Archiving and systematization of usergenerated content (e.g., videos) • Revenues through ad sales/data mining • Aggregation and systematization of product- and servicerelated information • Revenues from agency commissions and through ad sales/data mining

• Provision of online storage • Systematization of content, e.g., through categorization and ratings • Aggregation of product and service information • User-generated reviews of products and services • Price comparisons with links to online stores • Instant exchange of push messages • Support of data, audio and video streams

Microblogs, e.g., twitter. com

File Exchange & Sharing, e.g., youtube. com

Rating Portals, e.g., yelp.com

Instant Messengers, e.g., whatsapp. com

Podcasts, e.g., podcasts.com

• Exchange of text, audio, and video messages and content • Revenues through subscription fees, cooperation with companies, and data mining • Provision of audio or video content • Revenues through pay-per-use, subscription, and ad sales

• Topic-specific audio and video content • Possibility of subscription

User Value • Mediation of social contacts through digital interaction • High suitability for use in the mobile context (mobile networking) • Unfiltered personal publishing for “everyone” • Visual presentation of content • Fast and convenient opportunity to publish • High suitability for use in the mobile context • Broadcasting for “everyone” • Access to a large number of users/ audience • Independent product/service reviews from users • Simplifying and supporting decisionmaking and the buying process

• Fast and convenient exchange of messages • High suitability for use in the mobile context • Location- and time-independent use of content

(continued)

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Table 3.2 (continued) Application Wikis, e.g., wikipedia.com

Business Model • Collection, systematization, and further development of information • Revenues from donations

Tagging/ Social Bookmarking, e.g., delicious. com

• Classification and systematization of Internet offers • Revenues, e.g., from the sale of click streams for data mining purposes

Online Forums, e.g., topix.com

• Compilation, classification, and provision of usergenerated content on a single platform • Revenues through ad sales/data mining • Combination of multiple online software products/ API services • Revenues through ad sales and/or membership fees

Mashups, e.g., parkingcarma. com

Service Offer • Tools for creating and editing content by users • Provision of a platform for searching and presenting information/ knowledge • Central archiving and ubiquitous availability of bookmarks • Tagging of bookmarks • Access to link collections of other users • Exchange and archiving of thoughts, opinions, and experiences

• Creation of new media content by recombining already existing content

User Value • Aggregation of subject-specific information • Freedom concerning content/ authors • Users as a collective editorial • Individual editorial workup of the Internet

• Increase in knowledge • Problem-solving through community • Structured documentation of topics and opinions • Exploitation of synergies between different social media applications • Time savings

Source: Wirtz (2011b, 2020b)

These technologies reside more or less between traditional print and broadcast media and mainly serve information purposes. The business model of blogs and RSS feeds involves the systematization and compilation of online diaries and generates revenue based on ad sales, usage or subscription fees, and data mining. Its service offer entails the provision of an authoring tool for creating blogs, as well as the hosting and categorization of blogs. The opportunity of publishing and visually presenting unfiltered and personal content represents the core user value. Overall, these applications are quickly and easily set up and thus reflect helpful tools to keep customers informed. Microblogs represent a more specific type of blogging through which users can publish short messages that often have less than 140 characters and that can be made accessible to the public or a selected group of people. Twitter is the world’s leading and by far most frequently used microblogging service. The business model of microblogs includes the compilation and provision of user-generated content on a single platform and generates revenue based on ad sales and data mining. Its service

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offer is a special type of blogging for quickly publishing short messages. In particular, the fast and convenient opportunity to publish and the high suitability for the mobile context provide value to the user. For companies such a service may be an important means to approach the general public, bind customers, and advertise their own brands and products. In addition to blogs and social networks, file exchange and sharing is another type of social media. Among the most popular file exchange and sharing websites on the Internet are YouTube, Flickr, and SlideShare. These platforms allow to spread multimedia content like photos or videos usually uploaded by users. File exchange and sharing applications allow users to share media content, which here refers primarily to file transfer and content distribution. Accordingly, the business model of file exchange and sharing contains the archiving and systematization of usergenerated content (e.g., videos), generating revenue based on ad sales and data mining. The service offer entails the provision of online storage and the systematization of content, for instance, through categorization and ratings. The opportunity of broadcasting for “everyone” and the access to a large number of users or audience represent the core user value. These services also offer social features to their members. For instance, users can watch, rate, and comment on videos published by companies on YouTube. The comment feature also allows companies to communicate with users. However, many users of these websites do not have a membership but only visit them to look at photos and videos. If companies have their own channel on YouTube, users can subscribe to this channel to obtain information on a regular basis and to be able to directly access further video posts of the company. These posts, for instance, may also contain product and service offers, as well as information with regard to discount promotions or new products. Overall, these applications can provide a lot of potential for businesses by informing users through additional media channels. Unfortunately, professional and sustainable file exchange or sharing communication usually requires expensive and complex preparation, like video shootings, photographers, etc. (Sheldon 2015). Rating portals such as yelp.com are further important social media applications that foster independent product and service reviews. This creates market transparency, supporting and influencing decision-making processes of users. Especially this characteristic makes rating portals a double-edged sword. Digital word-of-mouth recommendations enjoy considerable trust among users, and negative impressions may hinder digital business service provision. Hence, companies have to care for objective online feedback and actively manage associated web content (Yoo et al. 2015). The business model of rating portals involves the aggregation and systematization of product- and service-related information, generating revenue based on agency commissions, ad sales, and data mining. The service offer comprises the aggregation of product and service information, the provision of user-generated reviews of products and services, as well as price comparisons with links to online stores. In particular, the independency of reviews from other users, as well as the simplification and support in the decision-making and buying process, provides value to the user.

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Instant messengers such as WhatsApp or Viber are social media applications that allow users to exchange messages quickly and conveniently. More specifically, their business model includes the exchange of text, audio, and video messages and content, generating revenue based on subscription fees, cooperation with companies, and data mining. The service offer accordingly includes the instant exchange of push messages, as well as support of data, audio and video streams. The value for the user lies particularly in the speed and convenience of exchange and the high suitability for use in the mobile context. The most famous example of an instant messenger is the mobile messaging app WhatsApp that has pretty much replaced the function of SMS use on mobile devices. Beyond normal text messaging as well as audio and video calls, WhatsApp users can create groups and send each other images and video and audio files without limit. Companies are increasingly using WhatsApp to communicate directly with their customers and to inform them about company news. Podcasts are helpful tools that enable users to consume online content at any place and at any time. Popular podcast providers are, for instance, Libsyn or podcast.com. Similar to blogs and RSS feeds, podcasts allow a quick and easy setup of an additional online information application. Users can subscribe to these podcasts and stay informed about the respective content. The business model of podcasts contains the provision of audio or video content, generating revenue through payper-use and subscription fees, as well as ad sales. The service offer not only comprises topic-specific audio and video content but also the possibility to subscribe to respective offers. In particular, the location- and time-independent use of content provides value to the user. Wikis are collaborative platforms that serve as community-based knowledge creation and sharing exchange stations. Users aggregate subject-specific information and participate as a collective editorial team, creating extensive knowledge encyclopedias. Thus, wikis provide an excellent opportunity for collaborative knowledge creation between users and firms in a digital business setting. The business model of wikis entails the collection, systematization, and further development of information, generating revenue from donations. The service offer comprises tools for creating and editing content, as well as the provision of a platform for searching and presenting information or knowledge. The value for the user lies particularly in the aggregation of subject-specific information, the freedom with regard to content and authors, as well as the collective creation process among users with regard to editorial work. Tagging and social bookmarking applications such as delicious.com classify and systematize Internet offers through the individual editorial workup of bookmarks. Accordingly, the business model of tagging and social bookmarking services consists of the classification and systematization of Internet offers, generating revenue based on the sale of click streams for data mining purposes. The service offer comprises the central archiving and ubiquitous availability of bookmarks, as well as the tagging of bookmarks and the access to link collections of other users. Thus, users can also share their links with other users and create common collections. While the individual editorial workup of the Internet provides value to the user, service providers can market their portal by creating the possibility to tag

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their service offer. Apart from that, companies should seek to be present on tagging platforms to create user awareness and actively market their own bookmarks. Online forums such as topix.com are technology-based and topic-oriented discussion platforms on the Internet, where users can publish content and share their thoughts, opinions, and experiences with other users. The exchange of information follows the principle of a bulletin board or starts with an initial user post to which other users respond. The resulting thread is mostly presented in chronological order. Moreover, moderators or administrators usually monitor online forums. The business model of online forums includes the compilation, classification, and provision of user-generated content on a single platform, generating revenue based on ad sales and data mining. The service offer refers to the exchange of archiving of thoughts, opinions, and experiences. In particular, the increase in knowledge, the problemsolving through the community, and the structured documentation of topics and opinions provide value to the user. Mashups such as parkingcarma.com describe the creation of new content based on combinations of already existing content. In the context of digital business, the business model involves the combination of different online software products or API services, generating revenue through ad sales and membership fees. The service offer contains the creation of new media content by recombining already existing content. The value for the user particularly results from the synergies between the diverse social media applications and the associated time saving. Given these social media application characteristics, social media can be generally expected to become more and more important for B2C communication and interaction (Huang and Benyoucef 2013). Against this background, social media adoption will constantly increase, making it a top priority on every digital business agenda (Wirtz and Göttel 2016).

Social Media Microtargeting and Social Media Multiplier Effects Social media offers the possibility of optimizing advertising and digital communication by using targeting. The general process and different methods of targeting are explained further in Chapter 14. Especially microtargeting plays an increasingly significant role in the context of social media. In this context, microtargeting refers to gathering data or information about individuals via social media and using it to target and approach specific target groups with personalized messages. For example, microtargeting is regarded a crucial driver of President Trump’s success in the 2016 US presidential election. More specifically, Trump’s election campaign was supported by a company that created personal profiles of potential voters based on their Likes on Facebook and then targeted them with personalized marketing messages (Forbes 2016). However, it is essential to consider carefully the desired social media purposes with their respective benefit potential. Against this background, blogs and content communities should be mainly used for information purposes, while social

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networking sites are rather suitable for B2C interaction. Apart from that, wikis and podcasts are helpful tools to build up knowledge-creation platforms, as well as file exchange and sharing platforms that support information diffusion through respective applications (Sheldon 2015). Another characteristic of social media is that almost all tools can be linked to each other or integrated. This represents an important feature of social media, since most members of a particular social network are often active on other platforms as well. Examples of integration (or mashups) are as follows: • The Facebook page of a company can be linked to its Twitter account to present tweets outside of Twitter. • YouTube videos can be embedded in the company’s blog or Facebook page. • If a company links bookmarks on delicious.com, other blogs can automatically publish their posts. Social media have specific characteristics that distinguish them from other media. Not every tool is equally suitable for different entrepreneurial objectives. In principle, however, social media business companies take advantage of the multiplier effect that can be achieved in social media applications with high user numbers. Figure 3.4 describes this effect. In digital business, companies are especially active on major communities, platforms, and portals to pursue their respective activities. In order to reach a high number of potential customers, companies should try to target opinion leaders. These are main influencers in many forums or other social networks, as they act as experts and thus have high influence within social communities.

Multipliers

…

User Positioning

Opinion Leader

…

User Companies

Social Media (Blogs, Wiki, etc.)

SocialMedia (Blogs, Wiki, etc.)

Opinion Leader

…

User …

User …

Social Media (Blogs, Wiki, etc.)

Fig. 3.4 Multiplier effect of social media. Source: Wirtz (2012a, 2020b)

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Social Media Convergence and Integration Recently, the social media landscape has been undergoing two major developments. On the one hand, social media services are becoming increasingly concentrated within a few companies through strategic acquisitions. Facebook, for example, has acquired more than 50 companies since its formation in 2004. Among its most famous takeovers are the photo-sharing application Instagram for 1 billion USD in 2012 and the mobile instant messenger WhatsApp for 19 billion USD in 2014. Moreover, Facebook also tried to buy the image messaging service Snapchat in 2013, but the 3 billion USD acquisition offer was turned down by Snap Inc. On the other hand, social media offers are increasingly assimilating or converging in terms of their set of features. Facebook and Twitter, for instance, have repeatedly imitated certain features of each other in the past. While Facebook adopted the so-called hashtag feature from Twitter, the latter introduced a title picture in addition to the profile picture, shortly after Facebook had launched this feature. Other social media providers pursue a similar strategy. Snapchat, for example, was originally a messenger app through which users could send each other pictures that were automatically deleted after a short period. In the meantime, it has developed more and more into a service like WhatsApp, which is more suitable for the mass. Just like with WhatsApp, Snapchat users can now also send each other videos as well as text and audio messages or make phone and video calls. This convergence of social media offers or emergence of me-too products especially results if an acquisition is not possible. If a company cannot take over its competitors, it needs to imitate their products or create similar ones in order to cannibalize their success and prevent them from maximizing their market shares. Moreover, companies seek to keep their users in their own product world and prevent user churn particularly to those competitors with similar value propositions. From a strategic point of view, a main reason why Facebook acquired Instagram and tried to take over Snapchat was not only because both companies were innovative start-up players with similar value propositions but also in response to user churn with regard to younger users who increasingly prefer to use Instagram and Snapchat (iTech Post 2016). Another significant reason for such strategic acquisitions is user growth. For instance, when Facebook took over WhatsApp, it acquired about 500 million active WhatsApp users. From a strategic perspective, companies aim to achieve a high user base to use it as a strategic barrier to market entry and thus to increase their market power. Finally, the above-mentioned acquisition and convergence strategies also represent measures for companies to achieve their goal of an integrated product or service portfolio. If companies accomplish to cover and satisfy the full range of user needs, the user is likely to have no reason or desire to leave. In this connection, Fig. 3.5 illustrates the development of Facebook’s integrated product and service offering, showing the organic functional enhancements and acquisitions over time (content adapted from Facebook 2018).

FacebookWall

FacebookProfile networking

Year 2004

Expanded registration

FacebookAPI Facebook for Mobile News-Feed & Mini-Feed

FacebookPhotos

Facebook in Spanish

Facebook Connect

New Profile

Acquisition of Oculus

Acquisition of WhatsApp

Paper

Trending

Instagram Direct

Internet.org

Videos on Instagram

Reactions

Facebook Sports Stadium

Transportation on Messenger

Acquisition

Messenger 4

Lead Templates for Business

Portal/ Portal+

Watch Together

Messenger Kids

Games

Workpl Acquisition ace of Sanzaru

Dark-Mode

Workplace

Dating

Marketplace

Organic function enhancement

Hello

Messenger -Platform

360°Videos

Events

New tools for Nonprofits

LiveVideo

360°Photos

Facebook Lite Automatic Alternative Oculus Text Rift

Instant Articles

Moments

Groups-App

Safety Check

Messenger Lite

Internet.orgPlatform

Instagram Search & Explore

Instagram Hyperlapse

Free Basics

Save

Facebook Mentions

FacebookHome

Acquisition of Atlas

Graph Search Beta

Gifts

Nearby Friends FacebookCamera Anonymous Login Facebook-

Acquisition of Instagram

iPadApp

Timeline

New GroupsApp

FacebookPlaces

FacebookQuestions

Facebook Usernames

LikeButton

iPhone-App

Self-ServiceAds Platform & Pages

FacebookPlatform for Mobile

Marketplace -App

FacebookVideo

Facebook -Platform

FacebookChat

Video calling

Donate

Video calling in Messenger

Stories

Year 2020

UserGroupn

UserGroup5

UserGroup4

UserGroup3

UserGroup2

UserGroup1

Facebook

Integrated product and service offering of

Usern

User5

User4

User3

User2

User1

3.2 Applications and User Groups in Social Media Business 79

Fig. 3.5 Development of the integrated product and service offering of Facebook. Source: Wirtz (2020b) and updates

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User Groups in Social Media Business Moreover, the availability of knowledge represents an important criterion for selecting an appropriate instrument for social media business. The respective company should have an understanding of the target recipient and thus shape the activities in social media according to the targeted groups. These groups differ by means of their involvement. Companies can therefore make a distinction between inactive users, spectators, newcomers, collectors, critics, and creatives. The level of activity is the decisive criterion in this definition. While the “inactive” deny the use of social media, the “spectators” are passive and only consume social media content that requires no registration. “Newcomers” have their own profiles on social platforms and are active in developing their profiles. “Collectors” and “critics,” by contrast, have increased activity and contribute actively with reviews or by modifying content. “Creatives” eventually run their own platforms and significantly define the content of social media. Table 3.3 outlines the different user groups (content based on Li and Bernoff 2011). Table 3.3 Social media users and their activities User Groups with Different Involvement Inactive users Spectators

Newcomers Collectors Critics

Creatives

Social Media Activities • No interest in a social media presence • No sign of any activity on social media applications • Consume content on different social media platforms such as product review sites, blogs, streaming platforms • No contribution of own content • Regular maintenance of the profiles on social media platforms • Open to other social networking sites • Use of RSS feeds • Use of bookmarking services • Active participation in product rating portals • Modification of articles on wikis • Commenting on blog posts • Release own publications on blogs and other sites • Customize design of own websites • Upload of videos, music, or other media contents • Publication of own articles

An important decision criterion for companies on which social media channel they ought to show presence is the usage intensity of different user groups (Wirtz et al. 2017b). In this regard, significant differences for the various social media instruments can be noticed. Against this background, it is useful to take a look at the development of social media use in recent years. Figure 3.6 illustrates the development of monthly user numbers for a variety of social media services.

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0,35 0,3 Reddit

0,24 0,16 0,14

0,33 0,33 Twitter

0,31 0,3 0,22 1 0,75

Instagram

2018

0,55

2017

0,4

2016

0,25

2015 2014 1,33 Whats App

1 0,8 0,49 1,9 1,5

Youtube

1,4 1,33 1,25 2,26 2,04

Facebook

1,75 1,52 1,33 0

0,5

1

1,5

2

2,5

Monthly social media users in billions

Fig. 3.6 Development of monthly social media users in billions. Data source: OurWorldinData (2019)

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Consequently, companies worldwide use very different social media channels, dependent on their business purposes and target groups. According to a study by Hootsuite (2018), major international companies particularly use social networks (Facebook and LinkedIn), file exchange and sharing services (YouTube), as well as blogs and microblogging services (Twitter and Instagram) (see Table 3.4). Table 3.4 Company’s social media use worldwide

Facebook Twitter Instagram LinkedIn YouTube Google+ Messenger (Facebook) Pinterest WhatsApp Snapchat Wechat Xing

NA (Northern America) (%) 96 87 77 65 62 31 31

EMEA (Europe/Middle East/Africa) (%) 93 86 69 65 62 36 26

APAC (Asia Pacific) (%) 97 64 75 62 57 26 36

Germany (%) 93 75 73 51 67 37 20

30 5 12 2 0

21 27 3 2 4

16 15 8 9 0

22 21 4 1 49

Data source: Hootsuite (2018)

More than 90% of internationally active businesses are using Facebook. Dependent on the country of origin, Twitter and Instagram are used by 73–87% of companies. Furthermore, more than half of these companies use a LinkedIn account. US companies are considered pioneers in the use of various forms of social media, closely followed by European and Asian companies. At present, the social networking site Facebook is the most important platform for digital business as it is the most popular site for users and thus also for companies and advertisers. Therefore, Table 3.5 depicts the profile of Facebook users in the United States according to gender and age. Table 3.5 US Facebook user profile

Age 13–17 18–24 25–34 35–44 45–54 55–64 65+

Male (%) 1.1 7.0 13.6 8.8 6.6 4.8 4.1

Data source: NapoleonCat (2020)

Female (%) 1.3 7.5 13.6 10.1 7.9 7.0 6.6

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Table 3.5 shows that usage is distributed across all age groups. In general, female persons tend to use Facebook more than males. The groups of the 25–34- and 35–44year-olds represent the highest number of Facebook users. The age group of 13–17year-olds shows the lowest Facebook use in this analysis. Overall, the social networking site is an important platform for digital business, especially due to its different user groups, as it unifies various target groups for companies and advertisers.

3.3

Digital Disinformation on Social Media

Over the past two decades, the Internet and social media have become important sources of information and news stories. Reading and sharing information and news content via social media has become a common habit within our societies.

News Consumption on Social Media The high distribution of social media has significantly changed online communication structures. Internet users are no longer only recipients of news and information but have also become important transmitters. Since mobile Internet has become widely available, exchange of news and information is possible almost at anytime and anywhere for anyone. In these circumstances, the Internet is not only a main source of information on shopping, health issues, and career options, but it has increasingly grown to be a key source of news about world affairs. Thus, the Internet and especially social media have turned into a tool of political opinion formation. Given the high relevance of the Internet and social media as opinion-forming news media, the phenomenon of digital disinformation is gaining increasing importance. Figure 3.7 illustrates this development, showing that in 2018 social media outpaced print newspapers in the United States as a news source. In 2018, 20% of US Americans reported to have often used social media as a news source (Pew Research Center 2018). In November 2019, 18% of adults in the United States used social media even as their main source to receive political and election news, exceeded only by news websites and apps, which are used as the main source of political news by 25% of adult US Americans (Statista 2020g). In a survey among millennials in the United States in April 2019, 47% declared to use social

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16%

Newspaper

20%

20%

Social Media

18%

26%

Radio

2018 2016

25%

33%

Website 28%

49%

Television

57%

0%

10%

20%

30%

40%

50%

60%

Regular use in percentage

Fig. 3.7 Regularly used news sources in the United States. Data source: Pew Research Center (2018)

media as a news source on a daily basis, making it the most popular source to consume news on a daily basis among millennials (Statista 2020d). Figure 3.8 illustrates that this trend is dependent on users’ age. Younger users are more often consuming news on social media, while people at the age of 65 years and older get news most often from television and print newspapers. Given these developments in news consumption, digital disinformation has become an increasingly important challenge. Digital disinformation describes the systematic and intentional faking of online news and information. Organized groups or independent individuals spread false and misleading information to their own advantage or to the disadvantage of other individuals or groups. The Internet and especially social media, like Facebook, Twitter, or WhatsApp, are playing a key role and work as catalyst in the dissemination of false news and misleading content. As news consumption and information sharing have shifted to the digital context, they

3.3 Digital Disinformation on Social Media

85

39% 18%

Newspaper

8% 2% 8% 14%

Social Media

22% 36% 30% 28% 29%

Radio

65+ 50-64 30-49

13%

18-19 28% 28%

Website

42% 27% 81%

65%

Television

36% 16% 0%

20%

40%

60%

80%

100%

Regular use by age in percentage

Fig. 3.8 Most often used news sources by age in the United States. Data source: Pew Research Center (2018)

are now in a hardly regulated field that has already been plagued by several largescale disinformation campaigns.

Integrated Model of Digital Disinformation The process of digital disinformation can be depicted in an integrated model of digital disinformation (see Fig. 3.9) comprising five interdependent layers: (1) actors and their underlying motives, (2) types of disinformation, (3) distribution channels, (4) dissemination mechanisms, and (5) targets of disinformation.

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Disinformation Actors

Disinformation Motives

• Domestic/foreign governments • Political interest groups • Independent trolls/engaged trolls • Social and economic lobby groups • Partisan media • Conspiracy theorists •…

• Societal opinion polarization • Gain of political/social influence • Governmental propaganda • Directed erosion of political positions • Social infiltration • Social and economic pursuit of profit •…

Types of Disinformation Fabricated content

False connection

Misleading content

Imposter content

Manipulated content

False context

Clickbait

Satire or parody

Junk science

Concealed advertising

Digital astroturfing

…

Distribution Channels Instant Messengers

Social Media Platforms

News & Information Services

Facebook

WhatsApp

Fake news websites

YouTube

Snapchat

Google News

Instagram

Telegram

Wikipedia

Twitter

WeChat

Search engines (e.g. Google)

Reddit

iMessage

Podcasts

…

…

…

Dissemination Mechanisms Automated AI programs

Bot networks

Trolling industry

Social media groups

Social media likes

Social media shares

Key opinion leaders

…

Disinformation Targets Public

Individuals

Media

Political actors

…

Fig. 3.9 Integrated model of digital disinformation. Source: Wirtz (2020b) and updates

Disinformation actors are the individuals or institutions that initiate the disinformation process in the first place. Among the most important digital disinformation actors are domestic and foreign governments, political parties, minor interest groups,

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companies and individuals, as well as trolls engaged by third parties. Trolls are people who deliberately provoke and spread misinformation on social networks and forums in order to harm other people, groups, or companies. When characterizing the initiating actors, it is important to have their motives and intentions in mind, as there is no disinformation without purpose. Very different intents may be pursued, e.g., societal opinion polarization, gain of political influence or power, dissemination of governmental propaganda, deliberate undermining of political positions, change of opinion, social infiltration, and social or economic pursuit of profit. Accordingly, the underlying motive is an important factor in deciding what type of disinformation is created (in the following, see Wardle 2017; Farte and Obada 2018). Clickbait, for example, refers to online content with dubious factual information or erroneous political content that is promoted by misleading headlines in order to attract as many readers as possible. Usually, the underlying motive for clickbait is to gain advertising revenues per click. Another type of digital disinformation is fabricated content. This is new content that is untrue and has the purpose to harm and deceive others. Misleading content refers to a fraudulent composition of content in order to create false connections and to manipulate or deceive others. False information is considered imposter content, if true sources have been imitated by false, made-up sources. Moreover, manipulated content uses true information or real photographs that have been edited with the intention to deceive others. False context, as another type of digital disinformation, describes the combination of true content with false context information. False connections occur if headings, captions, subtitles, or visual content does not match the linked content. Satire or parody can also be a type of digital disinformation. It refers to content that is characterized by the use of humor, exaggeration, mockery, irony, and false information to comment on certain events, however, not with the intent to harm but to entertain people (Rubin et al. 2015). Digital astroturfing is a particular, less prominent type of digital disinformation that refers to fake grassroots activity on the Internet that appear in the guise of societal campaigns, citizens, or organizations but are instead backed by political actors or businesses (Kovic et al. 2018). Similarly, junk science is inaccurate, poor, and often faulty research that might be published to push an agenda. As another example of digital disinformation, concealed advertising refers to paid advertisements that appear in the guise of factual content or journalism work but aim at influencing elections or purchase decisions, for instance. Social media platforms differ in terms of user groups and purpose, representing unique social contexts. On Facebook, users typically share content with an assigned list of friends, while posts on Twitter and Instagram are mostly public. Due to its limitations on characters per post, Twitter is a popular tool for short and immediate commentary on real-time happening, while Instagram is a platform intended for sharing pictures, thus containing mainly self-promotional content. YouTube focuses on video content and is as such, second to Facebook, an important channel for news consumption in many countries. There are no strict boundaries between

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dissemination channels as it is common, for instance, to read news content on Facebook and share it via the messaging platform WhatsApp (Reuters Institute 2018). Within the category news and information services, first to be mentioned are fake news websites (e.g., NYTimes.com.co, ABCnews.com.co, American News) that are deliberately spreading false information and in some cases are trying to masquerade as established news media (e.g., The New York Times, ABC News, etc.). Moreover, websites like Wikipedia that depend on voluntary user participation can be intentionally corrupted by false information. Even algorithms of trusted search engines like Google or online news services like Google News can be duped to push fake news and make them seem more credible than they actually are. Eventually, any kind of information stream, be it news articles and audio or video podcasts, etc., may contain disinformation. The companies providing these new digital distribution channels specify which actions are possible (e.g., on a specific social network) and what kind of behavior is rewarded, be it gratifications by attention or even commercial revenues, also depending on their own business models (Unver 2017). This contributes significantly to the diffusion of disinformation and makes the role of social media companies an important one. Certain dissemination mechanisms define how disinformation diffuses online. Characteristics of the different channels, such as so-called “filter bubbles” on Facebook and Twitter, are particularly suited to increase dissemination. Cognitive drivers, i.e., psychological effects like truth bias, confirmation bias, and in-group favoritism, play an important role for liking and sharing content on social media and bring about social multiplier effects. Moreover, AI-based algorithms and automated AI programs that autonomously operate complex disinformation campaigns are of special importance in the digital context. Due to the rapid technological progress and the very dynamic development in the field of AI, these advanced systems become more and more effective and efficient and thus will gain even more importance in the area of digital disinformation in the future. AI-based automation tools are currently particularly popular in in the form of so-called bots, which are becoming increasingly prevalent in the social media disinformation context. Social media bots are automated identities that are used to support disinformation campaigns. They are especially capable of completing simple, repetitive tasks like collecting information or providing information in an automated and fast way. At the same time, they are capable of communicating with other people and systems or interacting with other users’ content while masquerading as real human users by means of fake user profiles (Woolley and Howard). Apart from bots, the trolling industry constitutes another important dissemination mechanism of disinformation. In the context of digital disinformation, trolls are individuals that deliberately provoke and spread false information online in order to harm others. Troll factories or troll armies are hidden units of trolls that are engaged by governments, intelligence agencies, parties, or political movements to operate

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targeted disinformation campaigns on the Internet or in social media, trying to influence public opinion in favor of their clients. This phenomenon has gained particular awareness in connection with Russian disinformation policy. For example, there are hundreds of people working in troll factories in St. Petersburg, sitting in a common building from where they are deliberately spreading fabricated or false information on the West and the Russian opposition on social media, in order to strengthen the Russian government in public perception and to weaken its opponents. Another mechanism of digital disinformation dissemination are social media groups that are purposefully and systematically mobilizing and organizing themselves online. By means of certain tools, such groups can arrange their campaigns and activities in a fast and easy way and spread their uniform messages coordinately and constantly (Broderick 2017). Likewise, key opinion leaders or influencers may serve as multipliers in disseminating disinformation. Opinion leaders have great public influence, since many people follow their opinions and advice. Finally, the fifth layer refers to the targets of disinformation action. Digital disinformation is often aimed at individuals (e.g., via microtargeting), politicians, media, or the public at large. In summary, the Internet and especially social media have become an established information medium, and particularly the younger generation uses them as a main source of information. Against this background, Internet and social media platforms are increasingly used for digital disinformation purposes in order to manipulate public opinion formation. The focus is not only on the multitude of actors and motives of digital disinformation but also on the different types, distribution channels, and dissemination mechanisms of digital disinformation.

Governance of Digital Disinformation Since information is a mainstay for decision-making, governance of digital disinformation has become an important subject for online companies, governments, and societies. A variety of possible countermeasures against digital disinformation is shown in Table 3.6. They range from using the deterrent effect of monitoring disinformation to education on media literacy, self-regulation of social-media platforms, and governmental data protection laws (which can, e.g., impede harmful microtargeting).

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Table 3.6 Governance of digital disinformation Social Measures

Disinformation Actors and Motives

Disinformation Types

Organizational & Technological Measures

Public & Legal Measures

• Monitoring Disinformation

• (Crowd-based) source ratings

• State sanctions

• Independent fact-checking

• Human-curated algorithmic

• Gatekeeping

organizations and websites

fact-checking • (Crowd-based) reporting tools

• Certifications • Indexing

• Inverse image search Self-regulation: • Standards and Guidelines Distribution Channels

• Voluntary self-regulation authorities

• Internal standards and guidelines • Digital Disinformation Officer

• Fact-checking requirements • Requirement of verified standards and guidelines

(DDO)

• Rethinking business models • Revised technological infrastructure Education: Dissemination Mechanisms

• Social media alerts

• Ban of trolling industry and dissemination bots

• Source criticism

• Ban of purchased social media

• Media literacy

interaction

• Media effects

Disinformation Targets

Communication:

• Clearing

• Agenda-setting

• Fact-checking app

• Corrections

• Reactive public relation

• Framing

3.4

• Data protection and data security laws

strategies

Success Factors in Social Media Business

Social media business is a challenge for companies. An early adaption of activities in social media can be an important competitive advantage. Companies have the opportunity to gain a competitive advantage if they use the cross-linked structures of the target groups and the resulting potential for their own purposes at an early stage.

Appropriate Handling of Data Protection A major challenge of social networks is data protection. Users, who publish a lot of personal information, offer companies the chance to identify their target groups and give them the opportunity to address customers individually. However, persistent problems with both copyright infringement and data protection can result in legal disputes with social network sites or other communities. Due to these problems, users often use false information in the registration and creation of their user profiles. However, it is important for companies to detect truthful information about the users,

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91

in order to match the respective social media business campaign to the adequate target groups. This is only possible if the data is based on true demographic information. If this issue can be resolved for the users of social media, a wide range of opportunities for business will arise through the use of social media, also in connection with other forms of digital business. For example, social media business has already strong links to m-business. Powerful smartphones together with mobile Internet access provide favorable conditions for the growth of mobile social media business. The owners of smartphones use multiple social platforms in a much higher frequency than people without mobile devices. As the technological development is advancing and smartphones become increasingly cheaper, the mobile use of social media will continue to grow and open up further opportunities for social media business.

Four-Factor Model and Social Media Success Further success factors of social media business from a company perspective mainly rest upon the Social Media Four-Factor Model that provides an appropriate categorization in this respect. It distinguishes between four characteristic social media dimensions: social networking, interaction orientation, customization and personalization, and user-added value. With regard to the success factor of social networking, weblogs, microblogs, file-sharing and streaming platforms, rating portals, podcasts, mashups, wikis, social tagging and bookmarking services, as well as online forums facilitate the dialogue with customers or users. It also offers the opportunity to address multipliers and thus to achieve critical mass for business success. Social networks, instant messengers, and online forums are particularly suitable with regard to the success factor of social networking because they enable companies to systematically monitor customers/users and offer them greater possibilities for participation. Moreover, social networks, instant messengers, and online forums also offer companies a wide range of opportunities within the scope of interaction orientation, as they support a strong interaction with customers/users. While interacting via weblogs, microblogs, and rating portals may also be promising, this is much less likely with regard to social media business tools such as file-sharing and streaming platforms, podcasts, mashups, wikis, or social tagging and bookmarking services. While social networks also offer manifold opportunities for personalization or reconfiguration and thus highly take account of individual user preferences, the majority of social media applications—including weblogs, microblogs, file-sharing and streaming platforms, rating portals, instant messengers, podcasts, mashups, wikis, as well as online forums—show medium potential with regard to individual adjustments. Social tagging and bookmarking services have only low potential for customization and personalization. Regarding the success factor user-added value, especially social networks, rating portals, mashups, wikis, social tagging and bookmarking services, as well as online

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forums show very high potential. While other social media tools such as weblogs, microblogs, as well as file-sharing and streaming platforms mainly focus on generating user-generated content or user know-how and thus have medium potential with regard to user-added value, instant messengers and podcasts show low potential with regard to this dimension.

Business Potential of Various Social Media Tools Table 3.7 illustrates the suitability of the various social media instruments with regard to the dimensions of the Social Media Four-Factor Model and concludes with an assessment of their aggregate social media business potential (content based on Wirtz and Elsäßer 2012b). Table 3.7 Business potential of social media tools (company perspective)

Social Networking

Interaction Orientation

Social Networks e.g., facebook.com Weblogs e.g., blogger.com Microblogs e.g., twitter.com File Exchange & Sharing e.g., youtube.com Rating Portals e.g., yelp.com Instant Messengers e.g., whatsapp.com Podcasts e.g., podcasts.com Mashups e.g., parkingcarma.com

Wikis e.g., wikipedia.com Social Tagging & Bookmarking e.g. delicious.com Online Forums e.g., topix.com Legend:

= No Potential

Source: Wirtz (2020b)

= Very High Potential

Customization/ Personalization

User- Added Value

Business Potential

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93

Altogether, social networks and online forums are best suited for the social media business of companies. While weblogs, microblogs, rating portals, instant messengers, mashups, and wikis can also be promising instruments, file-sharing and streaming platforms, podcasts, as well as social tagging and bookmarking services have a comparatively low social media business potential. Considering the growth development of social media, there are many indications that this is not a short-term hype. This projection particularly rests on the stringent development of the information society with its high degree of information and participation among users.

3.5

Summary

• Social media are a group of Internet applications that are based on Web 2.0 technology and allow the creation and exchange of user-generated content. Social media business describes the initiation, support, management, and maintenance of transactions between economic partners via social media tools. • The Social Media Four-Factor Model consists of the four dimensions: social networking, interaction orientation, customization and personalization, and user-added value. It provides conceptual guidance and the key characteristics for using and adapting suitable social media applications. • Social networking describes structures of online interactions and consists of the subfactors social identity, social trust, digital word of mouth, and increasing user power. Drivers for user participation in social networks are especially the search for social approval and the desire for group membership. • Interaction orientation refers to the ability to effectively manage the demand of the general public for intense and authentic two-way communication businesses and consists of the factors user centricity, interaction configuration, user response, and cooperative value generation. • The possibility for users to customize online offers to their needs and preferences is reflected by the factor customization and personalization. Its subfactors are personal customization, group customization, and social customization. • User-added value refers to the value creation through the involvement of users and comprises various phenomena, like user-generated content, user-generated creativity, user-generated innovations, and user-generated revenue and contacts. • There is a great variety of social media applications that differ in terms of business model, service offer, and user value. These include, e.g., social networking that allows self-presentation and connection with other users, blogs and RSS feeds, file exchange, rating portals and instant messengers, as well as mashups. • User groups on social media can be characterized by their distinct levels of involvement. Inactive users show the lowest involvement as they don’t show any sign of activity on social media applications. In contrast, creatives represent the most involved user group on social media, as they release own publications on, e.g., blogs, customize their websites’ design, or upload media content. • As the Internet and social media have become important sources for news and information, digital disinformation poses an increasing challenge in this regard. The process of digital disinformation can be presented in an integrated model of digital

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disinformation, consisting of actors and their motives, types of disinformation, distribution channels, dissemination mechanisms, and targets of disinformation. • Countermeasures against digital disinformation can take all of these layers into account. Conceivable are social countermeasures and organizational and technological countermeasures, but also public and legal countermeasures.

Chapter 3 Questions and topics for discussion

Review questions 1. What is social media? Describe the difference between social media and Web 2.0.

2. Describe the Social Media Four Factors Model. 3. Explain the applications of social media with their respective service offerings and customer benefits. 4. Describe the Digital Disinformation Model. 5. Present the different governance mechanisms for the integrated Digital Disinformation Model.

Topics for classroom discussion and team debates 1. Discuss the effects of social media on the democratic understanding of open societies. 2. Discuss the advantages and disadvantages of social media for your personal use of the Internet and their effects on your social and leisure time behavior. Are social media really making the world a better place? 3. Discuss the dangers of fake news in social media. What social dangers arise from fake news and how can they be countered?

4

Digital Government

Contents 4.1 Basics of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actors of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advantages of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Country Ranking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Open Government and E-Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Open Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Open Government Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Participation and Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of E-Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Services and User Structure of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Government Services and User Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Success Factors of Digital Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . User-Centered Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Service Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IT Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

96 96 98 100 101 103 104 105 106 108 109 113 114 120 123 123 124 126 127

Learning Objectives By working through this chapter, you will be able to: 1. 2. 3. 4. 5.

Explain what digital government is about. Describe the concept of open government. Define e-participation and describe the strategic e-participation framework. Describe the channel characteristics of public service delivery. Explain the success factors of digital government.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_4

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Digital Government

Digitization, networking, and globalization connect individuals and organizations on a worldwide level and reduce the importance of geographical boundaries. The consequences affect both the private and the public sectors. Concerning the latter, the rapid evolvement from simple information access to providing complex processes and powerful tools and networks change the public service provision and process landscape. Thus, governments worldwide pursue digital solutions, which are particularly relevant for themselves and their stakeholders. This chapter describes the basics, actors, advantages, and the development of digital government. The concepts of open government and e-participation are explained in Section 4.2. In Section 4.3 digital government services and the user structure of digital government are presented. Finally, Section 4.4 describes the success factors of digital government.1

4.1

Basics of Digital Government

Digital government, which is considered a powerful system if applied effectively, may contribute substantially to stepping up to the plate since it is regarded to possess remarkable potential for improving the responsiveness of governments and the public sector to the needs of their stakeholders.

Definition of Digital Government Since the year 2000, the number of e-government and digital government definitions has significantly increased in the literature. Due to the growing integration of new digital technology concepts, in particular IoT, AI, big data, and cloud computing, the term digital government has become more and more appropriate and common in recent years. Table 4.1 depicts selected definitions that illustrate the different priorities regarding digital government. Although the definitions show differences in scope, subject, and technology, they also have certain similarities. First, a technology-enabled government is assumed. Second, information and services are provided online and unattended to government or public sector stakeholders. Third, accessibility, accountability, efficiency, effectiveness, and government-stakeholder interaction are positively influenced. Accordingly, digital government constitutes a technology-enabled part of the government or public sector governance model that allows unattended public stakeholder access to information and services; improves government-stakeholder interaction; fosters accountability, efficiency, and effectiveness; and forms the basis of e-democracy from a technological point of view. Thus, we apply the following definition throughout the book.

1

See for the following chapter also Wirtz and Daiser (2017) and Wirtz (2020b).

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Table 4.1 Selected definitions of digital government/e-government Author(s) Silcock (2001, p. 88)

UNDPEPA and ASPA (2002, p. 1) Carter and Bélanger (2005, p. 5)

Heeks (2006, p. 1)

Evans and Yen (2006, p. 209)

Spirakis et al. (2010, p. 75)

Veit and Huntgeburth (2014, p. 1)

Yavwa and Twinomurinzi (2019, p. 4) Twizeyimana and Andersson (2019, p. 167)

Definition “Simply stated, e-Government is the use of technology to enhance the access to and delivery of government services to benefit citizens, business partners and employees.” “[. . .] E-government is defined as: utilizing the internet and the world-wide-web for delivering government information and services to citizens.” E-government refers to “[. . .] the use of information technology to enable and improve the efficiency with which government services are provided to citizens, employees, business and agencies.” “[. . .] E-government in a broad sense: all use of information technology in the public sector. It covers a broad range of managerial issues: from high-level strategy to detailed tactics; from the technicalities of data flows and process mapping to the politics of e-government.” “Simply speaking, E-Government means the communication between the government and its citizens via computers and a Web-enabled presence. The advantages in timeliness, responsiveness, and cost containment are outstanding.” “Electronic government is the use of Information and Communication Technology in the transformation of government; primarily aiming to the improvement of accessibility, effectiveness and responsibility. It is based on the diffusion of the information and the information policy development. Electronic government guides to increasing citizens’ participation and active citizens’ development affecting the mechanisms of democracy.” “Digital government is defined as the use of Information and Communication Technologies (ICT), in particular the internet, to transform the relationship between government and society in a positive manner.” “Digital government is defined as a socio-technical phenomenon or mechanism by which governments provide efficient services using ICT in a seamless and interfaced manner.” “e-Government is commonly conceptualized as governments’ use of Information and Communication Technologies (ICTs) combined with organizational change to improve the structures and operations of government.”

Source: Wirtz and Daiser (2017) and updates

Definition of Digital Government (Wirtz and Piehler 2010) The term digital government describes the electronic handling of administration and democracy processed in the context of governmental activities by means of information and communication technologies to support public duties efficiently and effectively.

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Actors of Digital Government

Administration Citizen Organization

Information and service provider

All recipients and providers of digital government information and services within the digital government interaction procedures form the group of actors. This group can be divided into people (citizens), private sector organizations (organization), and public sector organizations (administration), which interact with each other and thus build the basis for the interaction patterns. Figure 4.1 presents these relationships.

Administration to Organization

Administration to Citizen

Administration to Administration

NA

NA

(Not Applicable)

(Not Applicable)

Citizen to Administration

NA

NA

(Not Applicable)

(Not Applicable)

Organization

Citizen

Organization to Administration

Administration

IntraAdministration

NA (Not Applicable)

NA (Not Applicable)

Intra

Information and service recipient Fig. 4.1 Digital government interaction matrix. Source: Wirtz and Daiser (2017), Wirtz (2016b)

The providers of digital government information and services establish the basis for service provision within the underlying electronic networks. They supply services that can be used by the recipients. For digital government, public administration (administration) is the prevalent information and service provider. The inter-connection among the digital government actors and the associated interaction patterns can lead to complex structures. In the following, a schematic digital government actors and interactions structure is presented (see Fig. 4.2) to better illustrate potential relationships that need to be established and managed.

Content provider

Other public sector organizations

Content and services

License

Fees

User generated content

Content and services

Content and services

Know how/ hardware

Fees (optional)

Technological infrastructure

Fees (optional)

User

Software developer

•Provider-generated content and services

•Interface for associated public service provision

Digital government information and service provider

Fees (if applicable)

User Internet access

Access to backbone networks

Know how/ hardware

Technology provider

Fee

Infrastructure provider

Fees (optional)

Internet service provider

Fee

4.1 Basics of Digital Government 99

Fig. 4.2 Schematic digital government actors and interactions structure. Source: Wirtz and Daiser (2017), Wirtz (2016b)

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Advantages of Digital Government Digital government promises to provide manifold game-changing advantages. It is supposed to ease access to public sector information and to make interaction with government and public institutions more convenient through online transactions, thus advancing public administration and transforming public service provision. Moreover, by shifting the interaction focus from a provider to a user perspective, digital government shall extensively enhance public sector service orientation (Holzer 2004). The concept embraces the idea of fostering internal efficiency, effectiveness, and productivity, and thus substantial digital government-related cost savings are expected (Parent et al. 2005). Increased accountability reflects citizens’ demands for transparency and improves control over government bureaucracy. Furthermore, digital government provides a toolset for e-democracy since the concept promotes knowledge sharing, participation, collaboration, and innovation. The potential benefits of digital government are summarized in Fig. 4.3.

Can renew the image of the government and the public sector

Eases access to public sector information Improves public sector interaction

Strengthens citizen trust in the government

Advances public service orientation and provision

Digital government advantages

Helps to promote natural resource management

Generates social, employment, health, and education benefits

Provides a toolset for e-democracy

Fosters efficiency and effectiveness

Augments transparency and accountability

Promotes participation, collaboration, and innovation

Improves control over government bureaucracy

Fig. 4.3 Expected advantages of digital government. Source: Wirtz and Daiser (2017)

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Development of Digital Government Applying new information and communication technologies to the public sector environment offered the prospect of enhancing the productivity of public administration and satisfying citizen demands for online information and service provision. This was the starting point for an increasing integration of these technologies into governance systems and processes, and public authorities began to digitally provide information and services to citizens and businesses. Figure 4.4 shows an overview of selected e-government acts and initiatives, some of which are briefly described below. A pioneer in electronic government services is South Korea, which already enacted the Computer Program Protection Act and Supply and Utilization of Computer Network Act in 1986 to secure network technology and infrastructure. By doing this, the country early set a clear digital focus and thus became one of the first movers in information and communication technology infrastructure development. In the case of the European Union, briefly after the establishment of the single European market in 1992, projects and working groups dealing with the application of information and communication technologies were set up. A key taskforce was the Bangemann group that produced a clear implementation roadmap that included three main targets: (1) destroy public information monopolies, (2) nurture competition, and (3) install pilot projects to reduce social resistance (Commission of the European Communities 1993; Bangemann 1997). The findings and subsequent actions of this approach were the first steps toward a fundamental change in European Union media and information regulatory behavior (Baubin and Wirtz 1996), which led to various European projects and initiatives that aimed to promote information and communication technologies. On the 17th of December 2002, the E-Government Act of 2002 was enacted in the United States. Its main purposes were the improvement of management and promotion of public online service provision as well as the establishment of a Federal Chief Information Officer within the Office of Management and Budget. It represents the political and legal foundation for all following e-government initiatives in the United States. He further directs the Chief Technology Officer to coordinate responsible departments and agencies in order to achieve the underlying principles of the memorandum. This is a clear statement for the future of digital government from a US perspective. In a similar way, other countries started their own programs to build digital communication networks. The European Commission’s Digital Agenda was announced in 2010 and forms one of the seven Europe 2020 strategy pillars. The Digital Agenda in turn comprises 132 actions based on seven pillars (I. Digital single market, II. Interoperability and standards, III. Trust & security, IV. Fast and ultra-fast Internet access, V. Research and innovation, VI. Enhancing digital literacy, skills and inclusion, VII. ICT-enabled benefits for the society) and proposes to better exploit information and communication technology benefits and potentials to foster innovation and economic growth. The Digital Agenda aims to reduce barriers that block a free flow of information and

1991

1993

2001

2002 2004

IDABC (until 2009, European Union)

2005

Interoperability Solutions for European Public Administrations (ongoing, European Union)

2008

2009

2010 2011

2016

2019

National strategy for artificial intelligence, e.g. in e-government (ongoing, Denmark)

E-Government Action Plan (until 2020, European Union)

E-Government Action Plan (until 2015, USA)

The European Commission's Digital Agenda (until 2020, European Union)

Master Plan for National E-GovernInformai2010 ment tization The Ministerial Roadmap (until 2010, (ongoing, Declaration on South eGoverment (until 2007, European Korea) (European Union) South Korea) Union)

Participatory Government's Vision and Direction of E-Government (ongoing, South Korea)

2003

Law Concerning the Use of Information and Communications Technology for Admin-istrative Procedures (Japan)

E-Japan Priority E-Government Act Policy Program (USA) (until 2002, Japan) & SWAD-Europe Project (until 2004, European Union)

1995

Promotion of Digitalization of Administr-ative Work for EGovernment Realization Act (South Korea)

Fig. 4.4 Overview of selected e-government acts and initiatives (1986–2019). Source: Wirtz and Daiser (2017) and updates

Master Plan for Promoting GovernmentWide Use of IT (until 1997, Japan)

1994

Basic Policy for the Promotion of Advanced The Golden Bangemann Information Projects Report and Communication (ongoing, (European China) Union) Society (Japan)

High Performance Computing Act (USA)

1986

Computer Program Protection Act and Supply and Utilization of Computer Network Act (South Korea)

102 4 Digital Government

4.1 Basics of Digital Government

103

digital services as well as updating relevant market rules within the European Union (Bertschek and Ohnemus 2016). Starting in 2019, the government of Denmark has launched “Denmark’s National Strategy for Artificial Intelligence,” consisting of 24 key initiatives, including several initiatives that are directly related to the public sector (OECD 2020). For instance, case processing is supposed to be quicker and administration to be more efficient through digital sorting of citizen inquiries, which ensures that citizens receive faster replies (Danish Government 2019). Looking at the worldwide history of digital government shows that the idea has already been successful, though digital government is still evolving and integrating new, advanced technologies.

Country Ranking However, there are wide disparities among the countries concerning their extent of e-participation and digital government readiness. These indicators are investigated in the United Nations E-Government Survey, which is a comparative ranking of the 193 member countries with regard to their e-government implementation state.2 The United Nations E-Government Development Index (EGDI) is based on three components: the scope and quality of online public services, the status of development of telecommunication infrastructure, and the status of human capital. Furthermore, the United Nations E-Government Survey explores regional trends and prospects, as well as changing focus topics, like requirements of digital government capacity and ways of building digital capacity for the public sector (United Nations 2020). The survey shows a steady global trend toward higher levels of e-government development, reaching from an average world EGDI of 0.47 in 2014 to 0.60 in 2020. Currently, the European countries play a leading role in e-government development (United Nations Department of Economic and Social Affairs 2020). The results of the United Nations E-Government Survey 2020 are displayed in Table 4.2. In a nutshell, governments have come a long way and have already reached a well-advanced state of e-government, but achieving the level of desired user centricity still requires a further transformational shift.

2

For further information see United Nations Department of Economic and Social Affairs (2020).

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Table 4.2 World e-government leaders in 2020 No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Country Denmark Republic of Korea Estonia Finland Australia Sweden United Kingdom New Zealand United States Netherlands Singapore Iceland Norway Japan

Region Europe Asia Europe Europe Oceania Europe Europe Oceania Americas Europe Asia Europe Europe Asia

EGDI 2018 0.9758 0.9560 0.9473 0.9452 0.9432 0.9365 0.9358 0.9339 0.9297 0.9228 0.9150 0.9101 0.9064 0.8989

Rank 2020 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Rank 2018 1 3 16 6 2 5 4 8 11 13 7 19 14 10

Source: United Nations Department of Economic and Social Affairs (2020)

4.2

Open Government and E-Participation

The topic of open government, which generally stands for the opening of government and administration to business and citizens (Wirtz and Schmitt 2015), has gained increasing attention in recent years. A key driver for its growing popularity in science and public management was the Obama Administration’s Initiative on Transparency and Open Government in 2009. Its global importance is underlined by the Open Government Partnership, which was established in 2011 and already counts 78 member countries (Open Government Partnership 2020). The core of this initiative was to create a transparent, participative, and collaborative government by involving public stakeholders in public policy and public administration processes. In addition, this change is supposed to lead to more effective and more efficient administrative procedures and prepare government for digital challenges (Wirtz and Birkmeyer 2015; Wirtz et al. 2018a). The basic idea behind the open government concept of making public sector data accessible is neither new nor groundbreaking. These considerations can be traced far back into the past within the context of freedom of information, anti-corruption, or previous transparency initiatives. US President Thomas Jefferson, for instance, already declared in 1789 that a certain degree of information availability and openness is necessary for the people’s trust in government (Yagoda 2010).

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105

However, considering the possibilities that modern information and communication technologies provide and leveraging them “to generate participatory, collaborative dialogue between policymakers and citizens” (Evans and Campos 2013, p. 173) show manifold opportunities for various areas, such as public policy, public management, governance, economy, and science.

Definition of Open Government Despite the increasing number of publications on open government in recent years, it is a rather young field of research, and definitions and explanations often still leave room for interpretation. This circumstance becomes clear when looking at popular open government definitions, which are presented in Table 4.3. Our understanding of open government implies a rather philosophical, meta-level character of the concept. In contrast, digital government can be regarded as a modern form of government from a functional and technical perspective that lays the basis for open government. Therefore, we apply the following definition of open government. Definition of Open Government (Wirtz et al. 2017a) Open government is a concept that generates a transparent, participatory, collaborative, and innovative government environment by providing existing data and knowledge to third parties and integrating external knowledge into political and administrative processes.

Table 4.3 Selected definitions of open government Author(s) OECD (2009, p. 113)

Harrison et al. (2012, p. 84)

Wirtz and Birkmeyer (2015, p. 2)

Definition “Open and responsive government refers to the transparency of government actions, the accessibility of government services and information, and the responsiveness of government to new ideas, demands and needs.” “Broader access to government data and other documentation, the ability to contribute to decision-making processes within government agencies, and the possibility of responsible engagement with agency leadership in such processes are incrementally more democratic actions that lie at the heart of the open government vision.” “Open government is a multilateral, political, and social process, which includes in particular transparent, collaborative, and participatory action by government and administration.”

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Open Government Framework The elements and relationships within the open government framework are deduced from the literature, which serves as a guideline for explaining the concept of open government. The framework consists of an internal (the three open government pillars: transparency, participation, and collaboration) and an external part (the external drivers: accountability, technology, acceptance and trust in government, and regulation and law) (see Fig. 4.5; content based on Wirtz and Birkmeyer 2015). Transparency is one of the most frequently mentioned aspects of open government. According to van Dooren et al. (2012), transparency consists of three elementary components: (1) systematic and timely release of information, (2) an effective role for legislature, and (3) an effective role for civil society through the media and non-governmental organizations. In this context, transparency requires adequate public access to relevant information, which constitutes another essential element of transparency (Dawes 2010). Participation, which means that public stakeholders become involved in public policy and public administration decision-making through information exchange, is another essential part of open government. This concept is supposed to encourage public engagement and increase government decisions through additional relevant input from public stakeholders. The third pillar of open government is collaboration. In comparison to transparency and participation, collaboration has so far not been directly associated with

Accountability

Technology

Public and Citizen Value

Citizen, Organization, and Society

Transparency

Participation

Collaboration

G2C/G2B Relationship

Government/Public Administration

Regulation/ Law

Fig. 4.5 Open government framework. Source: Wirtz and Daiser (2017)

Acceptance/ trust in government

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107

democratic political theory (Harrison et al. 2012). Collaboration aims at actively engaging public stakeholders in administrative procedures and effective cooperation among executive departments and agencies across all levels of public administration, as well as with citizens and private organizations. The three open government pillars (transparency, participation, and collaboration) target at creating and increasing public value, which is the key objective of the open government concept. Public value describes the value that the government contributes to citizens, organizations, and society and thus how public activities contribute to the common good (Moore 1995). Transparency, participation, and collaboration have a significant influence on government-to-citizen and governmentto-business relationships since high transparency, active participation, and effective collaboration strengthen the relationship between the government and its stakeholders (Geiger and van Lucke 2012). This core of open government is constantly influenced by external drivers, including accountability, technology, acceptance of and trust in government, as well as regulation and law. Accountability is a vital factor since a public administration that is accountable and responsible for its actions and decisions can be regarded as a prerequisite for democratic government as well as good governance. For this reason, accountability is considered to be a central element of democratic governance. Technology is a crucial external factor for the concept of open government. Web 2.0 technologies and social media, for example, have had a considerable impact on the relationship between the government and its stakeholders. The associated availability of information through modern information and communication technologies has led to well-informed stakeholders that are enabled to participate in administrative procedures. Since this factor, however, demands implementation and maintenance of adequate information and communication technologies, the associated technological development may require intensified investments. Acceptance and trust are further important factors for open government. In this context, acceptance can be understood as the degree to which citizens agree with the open government strategy and the government’s tools to implement this strategy, while trust describes the confidence of citizens in their government’s work. Especially transparency and public access to information can be conducive to acceptance, and participation and collaboration can serve to build trust since they allow public stakeholders to become part of administrative actions. Regulations and laws set the framework necessary for successful open government, because every administrative action requires and underlies a specific system of rules. Considering that open government is a transnational topic and every country has its own laws, open government concepts and systems can vary significantly between different countries. For this reason, regulations and laws are substantial external factors. Summarizing, digital government and open government should be viewed as complementary concepts. While open government is rather a philosophy or strategy on how to increase public value through transparent, participatory, and collaborative action by the government, digital government is concerned with the electronic

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handling of administrative procedures to support public duties efficiently and effectively. However, both concepts are mandatory and mutually dependent for government to become more transparent, more participatory, more collaborative, and more efficient, since digital government provides the required technological approach and open government the necessary conceptual framework. Considering the approach in this chapter, we focus on digital government without special reference to the open government concept, while keeping in mind that a digital government system should also always strive to realize the open government targets. As previously explained, citizen participation is a vital element of open government. Governments started in the 1960s to use citizen participation as an instrument “to enhance governmental legitimacy, foster public trust in government, and improve transparency of decision-making processes” (Wirtz et al. 2016a, p. 1). Given the importance of digital government development for citizen participation, in particular e-participation, this concept is explained in the following.

E-Participation and Digital Government The roots of e-participation date back to the 1960s. At that time, citizen participation started to become a topic of increasing interest. Two decades later, first ideas on e-democracy, which involves citizens in political and democratic procedures through the use of information and communication technologies, were presented. Given these developments as well as the progress of digital government and open government, e-participation gained considerable momentum and became a topic of high scientific and practical relevance. While the topic is still seen as an evolving concept, there is vast evidence that e-participation expands opportunities for civic engagement, supports sustainable development, and provides several political and societal benefits. It creates an intrinsic value for citizens that may deepen democracy and make governance more responsive and transparent. Moreover, integrating citizens into policy decisions may lead to more informed strategies and more inclusive societies. Furthermore, e-participation may promote effectiveness of public policy and service delivery and may mobilize new resources, capacities, and ideas (United Nations 2016). In essence, e-participation is about enhancing the interaction between the government and its citizens/stakeholders through active participation. Following the explanations of the OECD and the United Nations, this can be achieved through three dimensions: e-information provision, e-consultation, and e-decision-making (OECD 2001; United Nations 2016). This means that the government has to ensure that the relevant stakeholders receive and have access to the required information, to engage citizens/stakeholders in public policy, and to empower citizens/stakeholders through co-design and co-production of policy and public service components.3

3

See for the following also Wirtz et al. (2016a).

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Definition of E-Participation Although it is widely agreed that e-participation requires information and communication technology to provide input and exert influence concerning governmental decision-making and actions, there is still no commonly accepted definition of e-participation (Table 4.4). While these definitions also show differences, there are some substantial overlaps with regard to the general understanding of e-participation. A common feature is the information and communication technology-supported or technology-enabled interconnection between the government and its stakeholders. Furthermore, the citizens/ stakeholders experience an empowerment, allowing them to exert influence on policy content and processes, thus supporting their active engagement in policymaking. Against this background, we define e-participation as follows. Definition of E-Participation (Wirtz et al. 2016a) E-participation is a participatory process that is enabled by modern information and communication technologies, includes stakeholders in the public decision-making processes through active information exchange, and thus fosters fair and representative policy-making. Although several academics and practitioners attribute significant potential to e-participation initiatives, these often fall short of expectations. Since e-participation requires planning, coordinating, and monitoring, this process should be prepared systematically in order to increase the success of e-participation initiatives. For this Table 4.4 Selected definitions of e-participation Author(s) OECD (2003, p. 55)

Macintosh (2006, p. 364)

Sæbø et al. (2008, p. 400f.)

Definition E-participation as an electronic form of active participation is “a relationship based on partnership with government in which citizens actively engage in defining the process and content of policy-making. It acknowledges equal standing for citizens in setting the agenda, proposing policy options and shaping the policy dialogue—although the responsibility for the final decision or policy formulation rests with government.” E-participation is “the use of information and communication technologies to broaden and deepen political participation by enabling citizens to connect with one another and with their elected representatives.” “eParticipation involves the extension and transformation of participation in societal democratic and consultative processes mediated by information and communication technologies (ICT), primarily the Internet. It aims to support active citizenship with the latest technology developments, increasing access to and availability of participation in order to promote fair and efficient society and government.”

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purpose, Wirtz et al. (2016a) deduced an integrated strategic e-participation framework that serves as a guideline for explaining the concept of e-participation and that helps public officials to identify relevant e-participation factors and drivers. The identified factors (e-participation targets, forms, strategies, instruments, and demand groups) and drivers (accountability, transparency, stakeholders, and technology) are presented in the following and conceptually summarized in an integrated strategic e-participation framework (see Fig. 4.6; content based on Wirtz et al.

Transparency

Accountability

E-participation targets

• Increase overall participation • Enhance information provision • Improve quality of public policies

E-participation forms

Information

• Strengthen public trust • Improve and share responsibility for policy-making • Raise public awareness and understanding for policy issues

Consultation

Involvement

Empowerment

Collaboration

E-participation strategies Isolated E-participation strategies

Integration/ coordination intensity

• Complete coordination • Interdependent instrument structure • No competition between instruments

Natural language interfaces

Argument visualization tools

Consultation platforms

Collaborative environments

Computer supported cooperative work

Collaborative management

Private Organizations

Content management

Content analysis

Deliberate survey

Online survey

Wikis

Chat rooms

Citizens

• High integration • High coordination

Mailing lists/newsgroups

Webcasting/podcasting

Search engines

Technology

Web portals

E-participation demand groups

Integrated

• Partial coordination of instruments/instrumentimmanent management • Loosely coupled structure • Coopetition between instruments

• Low integration • Low coordination

Weblogs

E-participation instruments

Combined

• No coordination of instruments • Independent instrument structure • Competition between instruments

Public Organizations

Stakeholders

Fig. 4.6 Integrated strategic e-participation framework. Source: Wirtz and Daiser (2017)

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2016a). The integrated strategic e-participation framework starts with the e-participation targets, which are pursued with the e-participation initiative. In total, six key targets can be identified: (1) increase overall participation, (2) enhance information provision, (3) improve quality of public policies, (4) strengthen public trust, (5) improve responsibility for policymaking, and (6) raise public awareness and understanding for policy issues. Having defined the e-participation target(s), the next step is the determination of the e-participation form. In this context, the International Association for Public Participation provides a widely accepted, sophisticated classification of interactions between the government and the community. The five categories are (1) information, provide balanced and objective information to the public; (2) consultation, obtain public feedback and expertise; (3) involvement, consider public concerns and aspirations by working directly with the public; (4) collaboration, incorporate public input by partnering with the public; and (5) empowerment, leave the final decision with the public (IAP2 2018). Concerning the distinctive strategic approaches, Wirtz et al. (2016a) apply the theory of transaction costs since it can be used to analyze an optimal level of integration to reduce organizational costs (Klein et al. 1978). Following this approach, which is based on the assumption that different levels of integration possess different transaction cost, three distinctive forms of integration emerge from which three types of strategies can be derived: (1) the isolated e-participation strategy, (2) the combined e-participation strategy, and (3) the integrated e-participation strategy. These strategies differ significantly concerning the integration and coordination intensity of the applied e-participation instruments. The isolated e-participation strategy is characterized by a low integration and an independent coordination of instruments. Thus, the e-participation instruments are managed rather individually, regardless of their respective strengths, weaknesses, and combinatory effects. This impedes the exploitation of synergy effects and may cause competition and cannibalization effects among the e-participation instruments and demand groups. The combined e-participation strategy constitutes a more sophisticated strategy, which distinguishes itself by addressing particular synergies between the instruments used. Although the instruments are in general still managed individually, they are partially coordinated and, thus, loosely inter-connected. The instruments are applied in a competitive way, meaning that there is still competition among the applied e-participation instruments, which is, however, alleviated compared to the isolated strategy. The integrated e-participation strategy is the most sophisticated approach. Here, all instruments are coordinated, meaning that the instruments are used and managed in a complementary way. Thus, the integrated e-participation strategy allows the highest degree of exploiting synergy effects. Given the high management and coordination effort of this strategy, it requires a high level of centralized e-participation integration and coordination competence. Having determined the e-participation target(s), form(s), and strategy, the provider of the e-participation initiative should select the appropriate e-participation

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instruments. For this purpose, e-participation providers can choose between 17 categories of e-participation instruments. This classification is based on the work of Tambouris et al. (2007), who scrutinized various e-participation projects concerning the applied tools and applications and derived a conceptual categorization that provides a suitable frame for classifying e-participation instruments. The 17 categories range from simple weblogs to more sophisticated platforms, visualization tools, and language interfaces. The e-participation demand groups are the target groups that are directly involved in and addressed by e-participation initiatives. This can be citizens, private organizations, and public organizations. In addition to these internal factors, there are also external drivers (transparency, stakeholders, technology, and accountability), which have an impact on e-participation initiatives. Transparency is an important driver for e-participation. This driver is expected to have a positive influence on democratic processes and increase public trust. Furthermore, transparency is believed to have the potential to reduce governmental misconduct (Etzioni 2010). In an e-participation context, the provision of information by government and the interaction between government and citizens enhance the overall transparency of decision-making in public policy (Macintosh 2004). Here, both adequate general public access to information (Dawes 2010) and the timely provision of information (McDermott 2010) are of crucial importance. Accountability is another important driver for e-participation. This driver is closely linked with transparency since accountability and transparency are mutually dependent and reinforcing. In the context of e-participation, accountability comprises aspects such as answerability, blameworthiness, and liability, which means that the government can be held responsible for its actions (Bovens 2006). A further important driver of e-participation is the stakeholders of the respective initiative. The term stakeholders covers more than the usual demand groups of the e-participation initiative. It also includes the entities that provide e-participation services, politicians, political parties, and politicians as well as citizens that do not play an active role in the e-participation initiative but are affected by the outcome (). The pressure of the stakeholder groups is a crucial e-participation driver (GarcíaSánchez et al. 2011). Finally, technology is a significant external driver of e-participation. Information and communication technologies provide the technological foundation for e-participation initiatives (Chadwick 2003), and social media technologies facilitate social interactions in the Internet. Especially the advent of social media has accelerated the impetus for governments to achieve the goals of transparency, collaboration, and civic participation (Bertot et al. 2010) As laid out before, e-participation initiatives are a vital aspect of digital government and open government undertakings. Similarly, they require—compared to the traditional approach— new forms of business models for delivering services, which are presented in the next section, just as user structure and digital government services.

4.3 Services and User Structure of Digital Government

4.3

113

Services and User Structure of Digital Government

Digital government portals can serve as service bundling platforms that combine the service offering of the respective public sector organizations and allow comfortable service provision. In this way, a one-stop digital government portal can be generated that centrally provides the formerly analog public services to its stakeholders online. This single point of access reduces the search effort for the user and allows more efficient administrative processes, resulting in cost and time savings. Figure 4.7 illustrates a schematic digital government portal network and its possibilities of interaction. A user survey on digital government in 2014 (Wirtz 2015b) showed that local digital government portals are the main Internet interface between government and citizens. Nearly half of the participants (43%) demonstrate high and very high usage of city portals, while these figures are 15% and 8% for regional and national portals, respectively. A possible reason why local-level digital government portals demonstrate the highest usage intensity is that business models on the local level, which

State agencies

Ministries

Federal agencies

Courts Data and e-service exchange

Municipalities

Interoperable, service-oriented digital government system with single point of user access

…

Integrated e-service provision

Citizens

Business organizations

Non-profit organizations

Public administrations/authorities

International public organizations

Fig. 4.7 Schematic digital government portal network. Source: Wirtz and Daiser (2017)

…

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primarily aim at providing the community with digital government services, show a stronger user orientation than the levels above. Consequently, they provide the main platform interfaces for user access. Figure 4.8 presents the usage-related results of the study.

15% 28%

4% 11%

34%

15%

22%

City portals

Very high usage High usage

17%

Medium usage

37%

Low usage

38%

No usage

30%

36%

6%

2% 6%

Regional portals

National portals

Fig. 4.8 Digital government portal use (Germany). Source: Wirtz (2015b)

Hence, it can be inferred that user orientation is vital for citizens’ acceptance of digital government portals. In the following, the main demand factors regarding digital government portals are examined in more detail.

Digital Government Services and User Structure When focusing on user-oriented aspects, digital government is regarded to have the potential to enhance the interaction between the government and its stakeholders (Wirtz and Kurtz 2017). To achieve this, governments need to be aware of the service and resource requirements of their users, answering the questions: What do users want and what do they expect from digital government? There exists an extensive collection of studies in the scientific literature on this topic, which provides various relevant user-oriented digital government factors. These range from elementary factors, such as technology readiness, to complex factors, like trust in government. It is important to understand that these factors are perceived factors. This means that there is usually not a definite, objective criterion but only the perception of the individual user who evaluates the respective issue based on personal reflection of reality, knowledge, prior biases, and experiences. Of particular importance are the functional e-demand factors that can be organized in three quality packages: use quality, system quality, and service quality (USS). Use quality refers to user-related factors before, during, and after use of the digital government system. System and service quality handle factors that are associated with the overall system quality or the quality of the service provided. Figure 4.9 presents the USS e-demand factor system.

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115

Functional e-demand factors

U

Use quality

• Ease of use/ usability • Usefulness • Security/privacy • Satisfaction

• Trust • Expectationconfirmation • Technology/ Internet literacy • Self-efficacy

S

System quality

S

Service quality

• Website design/ visual appeal

• Information/ service quality

• Functionality of the interaction environment

• Outcome quality

• IT system performance • IT system reliability

• IT/Internet readiness

• Responsiveness

• Web assistance/ personal interaction • Customization •…

•…

• Effort expectancy •… Fig. 4.9 USS e-demand factor system. Source: Wirtz and Daiser (2017)

Digital government services have become an important instrument of public administration. This evolution, however, was not a digital process that only required to flip the switch and all public service offers would automatically be available to the public stakeholders. It rather has been a long and cumbersome way of sequential service development and technology steps to reach the level of today’s digital government service provision. Figure 4.10 illustrates the different stages that digital government services can reach, which are varying in their degree of interaction and complexity. Taking into account the findings of previous digital government maturity level studies, the model consists of five key digital government development stages: (1) presentation/information, (2) communication, (3) transaction, (4) participation, and (5) open integration. With each stage, the digital government application reaches a higher degree of interaction, which in turn is also connected to an increase in complexity.

• Digital communication • Digital transmission of information • E.g., citizen inquiries via email

• Online transactions • Back-office integration • E.g., automated processing of a change of address

• Active user participation in administrative processes • E.g., e-voting or online poll for street naming

Complexity

• Direct user integration into administrative processes • E.g., joint decisionmaking for urban development

4

Degree of interaction

Fig. 4.10 Digital government development stage model. Source: Based on Wirtz and Piehler (2010)

• Static content • No personalization • Digital provision of information • E.g., opening hours of an agency

Presentation / information

Stage 1

Communication

Stage 2

Transaction

Stage 3

Participation

Stage 4

Open integration

Stage 5

116 Digital Government

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Figure 4.11 on the following page illustrates the application of Web 2.0 technologies using the examples of a local (the digital government portal of New York City), a regional (the digital government portal of Hong Kong), and a national digital government portal (Germany) for an integrated digital government user relationship management. While all levels in the example apply multiple technologies with the information and communication business model, the transaction model is built on its own digital government portal. Concerning the use of further technologies, blogs, content communities, and social networking sites are frequently applied. Thus, a digital government portal is another example of applying Web 2.0 technologies, which shows specific characteristics that are suitable to manage particular user relationships. Business model-related user demand

Information

Communication

Transaction

Integration

Frequency

daily weekly

daily weekly

weekly monthly yearly

weekly monthly yearly

• E-government portal • Blogs • Content communities • Social networking sites

• E-government portal • Blogs • Content communities • Social networking sites

• E-government portal

• E-government portal • Social networking sites

• E-government portal • Blogs • Content communities • Collaborative projects • Social networking sites

• E-government portal • Blogs • Content communities • Collaborative projects • Social networking sites

• E-government portal

• E-government portal • Collaborative projects • Social networking sites

• E-government portal • Blogs • Content communities • Social networking sites

• E-government portal • Content communities • Social networking sites

Local portal (e.g., New York City www.nyc.com)

Regional portal (e.g., Hong Kong www.gov.hk)

National portal (e.g., Germany www.bundesregierung.de)

Fig. 4.11 Integrated digital government user relationship management. Source: Based on Wirtz (2016b)

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Considering the four different digital government stages, information, communication, transaction, and integration, a smart combination of Web 2.0 technologies with the respective business model purpose fosters effective and efficient user relationship management. Since the creation of a user-oriented digital government service portfolio that adds public value is of paramount importance for a successful e-government portal, it is essential to look at specific digital government services, which are outlined in Table 4.5. For a digital government portal to be effective, it requires that users find their way around the portal easily and get to the desired services quickly. Therefore, the individual services offered are grouped and usually organized in specific digital government service preference categories. This way, the digital government services are provided in a thematic classification that is built on a multi-level design. The exemplary digital government service preference category structure that is shown in Table 4.5 provides a clear and transparent service offer that supports the user in finding the desired services. Furthermore, by aggregating the information and service offers into 13 categories on the first level, the user is not confronted with an Table 4.5 Digital government service categories Digital government service Civic and immigration services Health and medical services Business and employment services Taxes and duties services Car, transport, and road services Housing and property services Social and volunteering services Family services Government, law, and order services Arts, culture, and tourism services Recreation and sport services Libraries and education services Environment and recycling services

Information and service examples ID card, residence permit, driver license application, divorce information, voter assistance Insurance services, facility information, nutrition information, vaccines information License application, financial services, legal assistance, job portal, job hunting information Tax declaration service, tax payment service, property tax information Vehicle registration, public transport information, parking license service, accident information Affordable housing information, construction permit services, utility information Social security information, community program information, donation service Child care information, adoption information, day care center information Electoral matters, consumer protection, crime and government reports, coast guard information Locations, activities, funding and support, visitor information Park and nature information, sport locations, sport activities, youth event information Enrollment, e-book services, student support, rules and policies, adult education Garbage and recycling information, animal control, air and water quality information

Source: Based on Wirtz (2015b)

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information overload and can access the respective information and services step by step. Thus, the user may also discover further relevant information or additional services. However, the presented preference categories with regard to digital government services differ in their importance concerning public demand. According to the e-government citizen preference study by Wirtz (2015b) with 717 participants, the service preference categories can be divided into three priority areas: top, middle, and low priority (see Fig. 4.12). The four categories (1) taxes and duties services; (2) civic and immigration services; (3) car, transport, and road services; as well as (4) arts, culture, and tourism services are evaluated as important or very important by clearly more than half of the participants. Especially the services of the categories taxes and duties services (64%) as well as civic and immigration services (63%) are regarded as vital online service offers, being rated as important or very important by six out of ten respondents.

Important

Very important

Taxes and duties services

25%

39%

64%

Civic and immigration services

25%

38%

63%

Car, transport, and road services

25%

33%

58%

Arts, culture, and tourism services

26%

32%

58%

Libraries and education services

26%

26%

52%

Housing and property services

22%

26%

47%

Environment and recycling services

23%

24%

48%

Government, law, and order services

23%

24%

47%

Social and volunteering services

25%

21%

46%

Recreation and sport services

24%

22%

46%

Business and employment services

23%

22%

45%

Family services

22%

20%

Top priority

Middle priority

42%

Low priority Health and medical services

17%

21%

38%

Fig. 4.12 Importance of digital government service preference categories. Source: Based on Wirtz (2015b)

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Service Channels As part of the dissemination and commercial use of modern information and communication technologies and the Internet as well as the public acceptance of these media, online-based channels were put in place that have created various new digital service delivery possibilities. These stationary or mobile Internet-based interaction channels have become a vital factor for public service provision and user relationship management (Wirtz et al. 2003a). According to the public multichannel model of Wirtz and Langer (2016), public service provision and customer relationship management can be conducted via several channels in a digital government multichannel context (see Fig. 4.13). In a first step, they categorized relevant digital government service channels and distinguished between online- and offline-based service provision. At first glance, it may seem unusual to see telephone and telefax services in the online service category since these were established long before the rise of the Internet. However, telephone and telefax were switched from analog to digital IP-based technology and thus clearly classify as online channels. In a second step, the determined channels (e.g., counter/service desks, postal mail, social media, etc.) were evaluated according to their communication capacity, service delivery capacity, and cost-benefit ratio, which are three important channel characteristics from a provider perspective, describing their particular digital government value. A channel provides value to the multichannel digital government system if it is useful, effective, and efficient. These dimensions are reflected in the two criteria: communication capacity, which refers to communicative characteristics of the channel, and service provision capacity, which refers to the ability to support financial and legal interaction. In general, on the one hand, online channels support service provision with lower transaction costs than offline channels, especially when taking into account automated online communication channels. On the other hand, automated service provision is limited with regard to communication interaction. All public stakeholders—citizens, private organizations, and public organizations—possess certain reference points, which are beyond a digital government provider’s direct control but influence their opinion about particular topics. For this reason, digital government providers should try to follow reference point information flows to take appropriate measures in case these become conducive and constraining forces. Figure 4.13 provides an overview of relevant digital government online and offline channels as well as the associated customer touchpoints (content based on Wirtz and Langer 2016). Designing and implementing an efficient multichannel management demands a strategic and target-oriented approach. But so far, only little knowledge concerning systematic management of multichannel digital government is available for public managers. Inspired by the multichannel model that is applied within the field of

2. Postal Mail

1. Counter/Service Desks

6. Citizen-to-Citizen

5. Public Meetings

4. Field Representation

1. Telephone

3. Pub. Gazette and Priv. Papers

Transaction Points

Fig. 4.13 Channel characteristics of public service delivery. Source: Wirtz and Daiser (2017)

Citizen Reference Points

4. Email

Private Organization Reference Points

5. Official Website/Online Portal

Public Organization Reference Points

Service Points

6. Other Websites

Citizens

Communication Points

7. Messenger/Chat

Private Organizations

Information Points

2. Telefax

Customer Touch Points

Online Channels

8. Social Media

Public Organizations

none

low

medium

high

complete

Cost-Benefit Ratio

Service Provision Capacity

Communication Capacity

Offline Channels

3. Broadcasting (Radio, TV)

Public Service Provision & Customer Relationship Management through

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9. Mobile Media/Apps

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media and Internet management (cf. Wirtz 2002), Wirtz and Langer (2016) elaborated a public multichannel strategy framework, which is outlined in Fig. 4.14 (content based on Wirtz and Langer 2016). Approach

Aspects

Coordination

Isolated Channel Strategy

Organization

Integrated Channel Strategy

• Uncoordinated channels/ channel-inherent management

• Partially coordinated channels/channel-inherent management

• Completely coordinated channels/comprehensive channel management

• Closed channel structure

• Loosely linked channel structure

• Interdependent channel structure

• Channel competition

• No competition between channels

• Mostly lead channel Structure

• Multichannel structure

• Channel competition

• Lead channel structure

Formation

Combined Channel Strategy

• Channel-specific management

• Comprehensive channel management

• High individual responsibility • Low coordination • High decentralization

• Centralized overall channel management

• High interdependence • High coordination • High centralization

Fig. 4.14 Public multichannel strategy framework. Source: Wirtz and Daiser (2017)

The framework breaks public multichannel management down into three different strategies: isolated channel strategy, combined channel strategy, and integrated channel strategy. An isolated Channel Strategy refers to the situation that the individual channels of the multichannel system are run independently and are not linked to each other. This means, the individual channels compete with one another since users have to decide which channel to use and stick to their decision. The combined channel strategy also follows the approach of having a lead channel but distinguishes itself from the isolated channel strategy through the symbiotic use of additional channels that complement the lead channel. Instead of pursuing individual stand-alone channels, the combined channel strategy requires a comprehensive multichannel approach. This way, the advantages of different channels can be combined into the overall service provision. Moreover, a targetoriented, value-creating application of various channels leads to cost and convenience benefits for the user and the provider. The integrated channel strategy aims at providing digital government services through inter-connected and interchangeable service channels. This means that users can conduct administrative procedures in person or remotely and switch to another service channel during the process. For instance, a user begins a service online from a stationary personal computer, continues the service processing by handing in particular documents that he or she does not want to transmit via mail or Internet at the counter, and follows the status of the administrative procedure on a mobile device, such as a tablet or mobile phone.

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The right mix of multichannel digital government service delivery also strongly depends on the respective fulfillment of relevant success factors. Important digital government success factors that should be maintained from a provider perspective are outlined in the following chapter.

4.4

Success Factors of Digital Government

Today’s society has come a long way to a modern and efficient digital government. However to be successful, some key factors need to be considered. This section presents the most important government success factors from a user, e-service, and IT perspective.

User-Centered Success Factors From a provider perspective, there are five key user-centered success factors that a digital government system should provide by all means. These are ease of use/usability, usefulness, website design/visual appeal, assistance/support, and multichannel digital government service usage. Ease of use/usability measures the perceived user effort to become acquainted with and learn to use a new technology. If user effort is perceived to be high, then this reduces the probability that users actually use the technology (Davis 1985). Transferred to the digital government context, this means that the e-government portal needs to be set up in a way that is easy to understand and to use for the users (Wirtz et al. 2015). Usefulness measures the user’s subjective perception or impression that using a specific technology facilitates tasks or enhances performance (Wirtz and Piehler 2016). If, for instance, a new technology is not perceived as a value-adding or performance-enhancing tool, then why take the effort and bear the risk of moving on to a new technology or system? Thus, the digital government system needs to provide a clear value for the user. Website design/visual appeal is a further vital factor for the setup of a digital government system (Wirtz et al. 2016b). In summary, this refers to a user-friendly, transparent, and clear structure of the e-government portal or website. Key aspects are the presentation of content and the website layout, which mainly refer to graphical elements, such as color, typeface, or illustrations that should be deployed in a way to achieve a professional, harmonious, and appealing design. Although digital government service provision tends to be automated and technology-based, web assistance and personal interaction are very important factors for the users (Piehler et al. 2014). Furthermore, it fosters user trust and confidence in using digital government services. Here, digital government providers have to ensure that assistance and support staff are technically well-trained and that they provide help in a polite, convenient, caring, respectful, and friendly way.

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Ease of use/usability

Multichannel digital government service usage

Usefulness

User-centered success factors

Assistance/support

Website design/visual appeal

Fig. 4.15 User-centered success factors. Source: Wirtz and Daiser (2017)

Digital government providers need to be aware of the persisting mismatch between government and user channel preferences and thus have to adapt their service offering specifically to the users’ needs and requirements. The challenge for public administration is to provide digital government services that are suitable for all citizens and organizations. Thus, effective and efficient digital government service delivery requires a clear multichannel focus that aims at reaching all relevant public stakeholders. The following figure illustrates the main user-centered success factors from a provider perspective (see Fig. 4.15). Another set of highly relevant success factors is directly associated with digital government services and their provision. While user-centered success factors rather present important framework aspects on a meta-level, e-service success factors specifically address vital factors and characteristics of the digital government service portfolio. These are presented in the following section.

E-Service Success Factors Today’s digital government portals provide manifold services, ranging, for example, from comprehensive e-government offerings on citizenship, registration, and traffic to e-health offers or online job portals. In addition, many digital government providers present services for complaint management, for online appointment service, for checking the processing status online, for booking local sport and leisure activities online, and for online newsletters concerning local information.

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However, it is not just about providing digital government services to users. It is also important to tailor the digital government offers to the needs and the requirements of the users. For this reason, there are particular success factors that are specifically associated with digital government service provision. These can be divided into two categories: service-oriented and function-oriented success factors (see Fig. 4.16). While service-oriented success factors are primarily concerned with the question which services should be offered, function-oriented success factors deal with the question how these services should be offered. Thus, the latter also take into account behavioral aspects of the digital government-providing public sector organization, such as responsiveness to citizen requests. From a service-oriented perspective, providing an extensive set of full online digital government service offers is of vital importance. If users have the possibility to benefit from a far-reaching digital government service offering that can be entirely conducted online, this substantially increases user convenience.

Digital service success factors

Service-oriented

Function-oriented

• Providing an extensive set of full online digital government service offers

• High user/citizen-orientation of digital services

• Extensive breadth and depth of digital government service offer

• Responsiveness to requests

• Provision of participative digital government services • Opportunity to check processing status online • Comprehensive provision of file and document downloads • Provision of an online appointment service for administrative visits

• Information/service quality • Functionality of the interaction environment • Use of mobile applications for user communication and interaction

• Applying social media to user communication and interaction • Personalization/customization (e.g., age, social groups, etc.)

• Provision of a complaint management system • Provision of public open data • Provision of online newsletters Fig. 4.16 E-service success factors. Source: Wirtz and Daiser (2017)

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Having outlined user-centered success factors as well as e-service success factors, there remains a third category of relevant digital government success factors: IT success factors. These success factors, which are rather technological, are presented in the following section.

IT Success Factors Concerning the success of a digital government system, there are a couple of important IT success factors that should be considered when designing, implementing, and maintaining such as system. Since these factors refer to technology-related aspects, it is necessary to possess the respective technical IT skills and competencies—either in-house or out-house. Figure 4.17 summarizes the IT success factors. Very crucial factors are IT security and privacy, which are two important prerequisites for digital government user trust and user acceptance. In this context, security and privacy are understood as perceived safety, secrecy, and confidentiality of personal user data and network-based information processing. If users believe that their personal information is not safe, they will be more reluctant to perform digital government transactions online or will not conduct them online at all. IT system quality is another key success factor for creating a favorable e-government

IT security/privacy

Seamless multichannel IT support without media breaks

IT system quality

IT success factors

IT performance/ reliability

Fig. 4.17 IT success factors. Source: Wirtz and Daiser (2017)

Responsiveness of website and IT infrastructure

4.5 Summary

127

environment. It includes all technological aspects of an information system as well as the associated digital government processes and resources. IT infrastructure fault tolerances, server performance capabilities, as well as inspection and security procedures, for example, are important facets of IT system quality management. In addition, the digital government team needs to be aware of the detrimental effects of portal downtime, unreliable service provision, and so on. In case of a potential IT attack or breakdown, effective contingency plans have to be immediately at hand. Responsiveness of website and IT infrastructure is closely related to IT system quality. Today, long waiting times for new pages or data processing are not tolerated by users anymore. Perceived IT performance and reliability is a vital factor for using a digital government system. Like the previous factor, it is also associated with IT system quality. If performance or reliability of the digital government system is perceived to be weak, this finally reduces the user’s desire to use the digital government services provided. Another important factor from a technology perspective is seamless multichannel IT support without further media breaks, meaning that users should be technologically enabled to make use of full online government services through different online channels. This sets high demands on the interoperability of the applied digital government system and channels. Taking into account the key digital government success factors from a user, e-service, and IT perspective, should provide a solid basis for designing, implementing, and maintaining a successful digital government system.

4.5

Summary

• Digital government refers to the electronic handling of administration and democracy to support public duties efficiently and effectively. • Digital government promises many advantages; most importantly it is supposed to ease access to public sector information and to make interactions with government and public institutions more convenient. • Open government is a concept that generates a transparent, participatory, collaborative, and innovative government environment, as it provides existing data and knowledge to third parties and integrates external knowledge into political and administrative processes. • The essence of open government can be presented in form of the open government framework, which consists of an internal (the three open government pillars: transparency, participation, and collaboration) and an external part (the external drivers: accountability, technology, acceptance and trust in government, and regulation and law). • E-participation describes the possibilities of active information exchange between government and citizens with the help of information and communication

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• • • • •

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technologies in public decision-making processes. It enables the involvement of stakeholders and thus promotes fair and representative policymaking. Important demand factors of digital government are use quality, system quality, and service quality. A vital factor for public service provision and user relationship management is the use of service channels. Governments can decide to pursue either an isolated channel strategy, a combined channel strategy, or an integrated channel strategy. For digital government to be successful, the user-centered success factors (ease of use/usability, usefulness, website design/visual appeal, assistance/support, and multichannel digital government service usage) need to be considered. Additionally, service-oriented and function-oriented digital service success factors should be addressed. IT success factors of digital government can be subdivided into IT security/ privacy, IT system quality, responsiveness of website and IT infrastructure, IT performance/reliability, and seamless multichannel IT support without media breaks. They should not be neglected either in order for digital government to be successful.

4.5 Summary

Chapter 4 Questions and topics for discussion

Review questions 1. Define digital government and describe the actors and interaction structures. 2. Describe the benefits of digital government. 3. Define open government and present the open government framework. 4. Describe the stages of the digital government development stage model. 5. Explain the success factors of digital government.

Topics for classroom discussion and team debates 1. In many countries, digital administration lags considerably behind private and business Internet applications. Discuss why the public sector is having greater difficulty in pushing forward with digital governance. 2. Discuss the advantages and disadvantages of digital government, especially with regard to the aspect of a digital surveillance state. Is the transparent citizen sensible and desirable? 3. Discuss which applications are the most important in digital government for you. Can they make your life easier and be offered in the public sector without significant security precautions (identification and authorization)? (Privacy!)

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Part II Technology, Digital Markets and Digital Business Models

5

Digital Business Technology and Regulation

Contents 5.1 Basics of Digital Business Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Client-Server Interaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Web Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . World Wide Web Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Architectures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Technology at the Human-Machine Interface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Historical Development of the Human-Machine Interface Until 2000 . . . . . . . . . . Recent Developments of the Human-Machine Interface . . . . . . . . . . . . . . . . . . . . . . . . . Human-Machine Interaction and Configuration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Success Factors of Human-Machine Interaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Security in Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cybersecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Typical Threats in Computer Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cryptography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Blockchain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Digital Payment Systems and Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Payment Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Payment Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Regulation of Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Formally Binding Content-Related Level of Internet Regulation . . . . . . . . . . . . . . . . Regulatory Aspects of Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory Aspects of Societal Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory Aspects of Criminal and Civil Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Organizational, Decision-Making, and Competence-Related Regulation Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

135 135 140 141 147 149 149 157 159 162 163 164 165 168 171 173 174 178 179 181 182 183 183 184

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_5

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Learning Objectives By working through this chapter, you will be able to: 1. Explain the different client-server interactions such as the distribution of tasks between the client and the server or the Internet addressing with DNS. 2. Describe the HMI model of human-machine interaction and its success factors. 3. List the basic principles and applications of cybersecurity threats in computer networks. 4. Illustrate different digital pay systems and processes. 5. Name and describe the essential forms of digital regulation.

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The innovation in modern information and communication technologies and the parallel introduction of the Internet have changed many aspects of networking and global communication and have set the basis for innovations like digital business (Turban and Sipior 2015). Against this background, this chapter presents the key technological aspects and IT security issues of digital business.1 In doing so, this chapter first addresses the basics of digital business technology by presenting the most important technologies for web development and giving an outlook on specific digital business architectures. Subsequently, the chapter deals with technology at the human-machine interface and describes security concepts and fundamental dangers to computer networks. It then explains digital payment systems and applications before the last section presents regulatory issues in the context of digital business.

5.1

Basics of Digital Business Technology

The Internet has become a standard for supporting, executing, and maintaining data exchange processes between two or more actors via modern information and communication technologies (see for the following Chaffey 2009, Laudon et al. 2010, Wirtz 2013a). In principle, the Internet is a global networking and communication system that consists of computer networks, which in turn contain different subnetworks. The fundamental structure of this network rests upon the client-server principle, which—simply speaking—means that server computer provides files and applications that client computers can use (Srinivasan et al. 2002). A tight network of national, international, and intercontinental data lines forms the physical connection of this structure. The transmission of data via these networks rests on specific protocols and standards, which represent a set of basic rules and requirements, that structure and arrange the data exchange workflow in the networks. The dominating Internet standard protocol is the transmission control protocol/ Internet protocol (TCP/IP).

Client-Server Interaction Since the Internet is a rather loose network with constantly changing participants, each participant has to be uniquely identified in order to allow accurate exchange of digital data (Beynon-Davies 2013). For this reason, each participant receives an exclusive identifier from the TCP/IP when accessing the Internet, the so-called IP address, which is an Internet address written as numbers and separated by periods

1

See for the following chapter also Wirtz (2020b).

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(e.g., 192.124.238.252). Since accessing websites by using long sequences of numbers is bulky, domain names have been introduced that allow to identify servers by means of unique character strings (e.g., uni-speyer.de). The underlying domain name system (DNS) required is a database that allocates each domain name to the respective IP address. If a user tries to access a website through a domain name, the client sends a request to a DNS server that transmits the associated IP address (Baltzan 2014). Due to the high number of IP addresses and requests, there is also a considerable number of DNS servers, which map a specific part of the address directory. Therefore, the DNS routing follows a particular cycle. First, the client contacts the DNS server of the respective Internet service provider (e.g., AT&T, Comcast, etc.), which checks if the IP address is available in its database or its cache from a previous user query. If the IP address requested cannot be located, the DNS server of the Internet service provider takes over the role of the requester, contacting 1 of 13 root DNS servers that represent the supreme authority of the DNS directory. The root DNS server identifies the target DNS server, where the initially requested IP address is located and sends it to the requester (Papazoglou and Ribbers 2011). Next, the requester sends the initial IP address request to the target DNS server. After the target DNS server has answered the IP address request to the requesting server, it sends the IP address to the client. After receiving the IP address that is associated with the domain name, the client can access the desired website. Figure 5.1 illustrates the client-server principle and the DNS routing.

5.1 Basics of Digital Business Technology

137

1

Browser sends request to the webserver

2

Server sends file to the browser Server

Client

Internet addressing with DNS

Client 192.124.238.252 192.124.238.252

www.uni-speyer.de

Cache

Target Webserver (uni -speyer.de)

Local DNS Server (Target)

DNS Server (Requester)

• uni-speyer.de = 192.124.238.252 • xyz.de = 192.xxx.yyy.zzz • ….

Root DNS Server

Fig. 5.1 Client-server principle and Internet addressing with DNS. Source: Wirtz (2013a, 2020b)

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The types and range of services that a server provides to a client may strongly differ in practice. In principle, a server can supply a client with central services such as storage or processing of data. While the client is normally a common personal computer or mobile Internet device with restricted capability, a server is usually a powerful personal computer or a specific server computer with a very high memory and computing capacity. The type of application and the performance of the clients are essential criteria for the distribution of tasks between the client and the server (Papazoglou and Ribbers 2011). Figure 5.2 illustrates five possibilities of task allocation between client and server (content based on Krcmar 2005; Abts and Mülder 2017).

Event

Client

Service Request

Server

Data / Data management Traditional web application (Thin Client Design)

Visualization / Presentation

Application / Processing

...

Visualization / Presentation ...

Visualization / Presentation ...

Application / Processing Distributed Processing Cooperative Processing

Visualization / Presentation …

Data / Data management

Network / Internet

Hostsystem / Terminal System Remote Windowing

Application / Processing ...

Data / Data management Application / Processing ...

Application / Processing Central Data Storage Remote Data Base

Data / Data management Visualization / Presentation ... ...

Data / Data management Distributed Data Storage (Fat Client Design)

Application / Processing

Data / Data management

Visualization / Presentation

...

...

Fig. 5.2 Distribution of tasks between client and server

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The distribution of tasks between client and server may differ with regard to presentation, business logic, and data management. The presentation layer describes the visual output to a user or a user interface with the possibility to interact. The business logic focuses on the processing of user input and application data. Here, the actual data processing takes place. The data management describes the administration and storage of data that are required in the context of the application. The more tasks a client undertakes, the more performant it needs to be. In this connection, a thin client refers to a client that only performs the task of presentation and has a low performance. By contrast, a client with a performant hardware that not only carries out the task of presentation but also processes and manages data is the so-called fat client. The choice between thin and fat client as well as the type of distribution of tasks between client and server each implies advantages and disadvantages that need to be weighed up in a given case. In some cases, another selection of distribution of tasks may appear reasonable due to new technologies (Gelinas et al. 2004). While in the past a fat client and the model of distributed database or remote data management used to be mandatory for sophisticated (online) games, today such sophisticated (online) games may even run on thin clients. Cloud gaming providers such as Onlive.com enable gamers to play current games with sophisticated graphic design, for instance, on a tablet PC or a netbook. While the client only displays a video stream and passes on the user input to the server, high-performance servers take care of the storage, processing, and graphical computations. This specific case of application is well suited to explain the advantages and disadvantages of the different models of task distribution. While in the case of classic gaming a user needs to buy a very performant (and thus expensive) PC, a cheaper thin client is sufficient for online cloud gaming. In contrast to online cloud gaming that requires Internet access and where even a low bandwidth can impair enjoyment, a user can play without Internet access in the case of classic gaming. The right choice of the model of task distribution depends not only on the available hardware but also on the communication infrastructure. Another important aspect with regard to the exchange between client and server or the communication between users refers to the technical realization. The use of different services on the Internet allows to use and transfer data and information. Table 5.1 describes the most important services on the Internet.

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Table 5.1 Classification of the most important services on the Internet Services Word Wide Web

Protocol HTTP/ HTTPS

Description Transfer of websites

Email

SMTP/POP3/ IMAP

Data Transfer

FTP/FTPS

Encrypted Network Connections Virtual Private Network (VPN)

SSH

Exchange of electronic messages (with data attachments) Data transfer to Internet server Encrypted access to other computers Secure partial networks with restricted access on the Internet Use of remote computers Sharing site for decentral exchange of files Discussion forum

Remote Control

IPSec/TSL/ SSL/ViPNet/ PPTP/PPPD Telnet

Distributed Data Exchange (peer-topeer procedure) Usenet

BitTorrent/ Gnutella

Voice over IP (VoIP)

SIP/SIPS/ H.323/IAX/ MGCP/Jingle OSCAR/ Simple/ Tencent QQ/XMPP

Instant Messaging

NNTP

Phone via the Internet

Instant transmission of text messages; type of chat

Application Web browser (Google Chrome, Internet Explorer, Firefox, Opera, etc.) Email program (Outlook, Thunderbird, etc.) or web-based interface FTP clients (WS-FTP, FileZilla, etc.) PuTTY, WinSCP, etc. Different clients (OpenVPN, Cisco VPN, etc.) Functionality provided by operating system BitTorrent, Soulseek, WinMX etc. News clients, mostly integrated in email programs Skype, etc.

WhatsApp-Web, Facebook Messenger, Skype, etc.

Source: Wirtz (2016b, 2020b)

Web Services The most important and well-known services of the Internet are the World Wide Web (WWW) and email. The WWW led to the breakthrough of the Internet by enabling a graphical user interface and thus a simple and convenient navigation. As a result, the navigation and the provision of information became much easier. This easy navigation is realized by means of so-called hyperlinks that represent inter-connections to other documents on the Internet, for example, search queries to search engines such as Google.com or Bing.com that present their search results in the form of hyperlinks. Advancements in the WWW technology have facilitated the provision or retrieval of various multimedia content, such as images, sounds,

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animations, and videos. Email enables individuals and institutions to exchange messages. On the one hand, this allows transferring pure text messages and, on the other, to exchange files, such as image, video, and audio files. Furthermore, there are different formats or opportunities of secure communication and data exchange. While a SSH connection enables encrypted access to another computer, a VPN makes it possible to configure a secure partial network within the Internet with restricted access. A FTP is usually applied to transmit files to a server (host). In the context of private decentral data exchange, the peer-to-peer procedure, email and instant messaging have become prevalent as the most important Internet services. Telnet is another Internet service through which a user can access remote programs or data and telecontrol computers. Finally, Internet communication services are becoming more and more popular. Earlier communication offers, such as the Usenet through which users take part in discussion forums, are increasingly replaced by new technologies and applications. Especially instant messaging has become a popular communication service through which several users can communicate with each other by instantly transmitting text messages (Turban et al. 2013). Apart from that, voice over IP has developed to a popular form of communication since conversations on the Internet are free of charge or can be made at low cost into telephone and mobile networks.

World Wide Web Technologies The Internet provides users with a substantial amount of information content. This content consists of static content and dynamic content. Static content refers to web content that is exactly delivered to the user as stored on the web server (e.g., static presentation of the opening hours of a business). A dynamic website in contrast is processing data and provides the user with customized content (e.g., online creation of address labels for return delivery). This processing can take place on the client (client-side dynamic) or the server (server-side dynamic). Figure 5.3 illustrates the way of functioning of static and dynamic WWW documents.

Dynamically generated HTML page Server

Fig. 5.3 Static vs. dynamic WWW documents. Source: Wirtz (2013a, 2020b)

Client

5

Client

2

1

Delivered HTML page by server

Page is requested via browser

4

2

Complete page

User input

3

Server

Access to server resources

Execution of Script

WWW Documents with Server-Side Script Execution

Event

Modified HTML page

Page is requested via browser (with user input) 1

Execution of Script

Server

• Databases • Files •…

Resource

5

3

4

Delivered HTML/XML page by server

2

WWW Documents with Client-Side Script Execution

Client

Page is requested via browser

1

Display of Static WWW Documents

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From a service provider’s point of view, a server-side execution of a script should be preferred, if technically feasible. A client-side execution of a script is subject to the risk that the user has deactivated the execution of the scripting language or the latter is technically not possible. This means that the website does not include the range of functionality planned by the provider. The verification of form checkboxes may serve as an example here. By means of form checkboxes, a user can communicate with a service provider and transfer data. The service provider can check the data, for instance, for validity (valid email address) or completeness before storing them. This verification may take place through both client-side and server-side script execution. However, in the case of the client-side option, a user can avoid this verification by deactivating the scripting language. The server-side implementation has also certain disadvantages. The service provider needs to provide appropriate server capacity to supply the service, using server-side processing that performs sufficiently well. A service provider that uses a client-side dynamic can save expenses by employing smallerdimensioned servers. There are various web development languages to create static and dynamic WWW documents, which differ with regard to syntax, origin, and intended use. Figure 5.4 presents the currently prevalent static and dynamic languages of web development.

Technologies of Web Development

Static

Dynamic

Server

Client • (X)HTML

• JavaScript

• PHP

• CSS

• Java (Applet)

• CGI

• XML

• VBScript

• ASP

• XSL

• DHTML

• Java (JSP)

• Java (Servlet)

Fig. 5.4 Static and dynamic languages of web development. Source: Wirtz (2013a, 2020b)

Languages for developing static WWW documents are the Hypertext Markup Language (HTML), Cascading Style Sheets (CSS), Extensible Markup Language (XML), and Extensible Stylesheet Language (XSL). While (X) HTML and XML are text-based markup languages to structure content, CSS and XSL are formatting languages. This means that HTML/XML can describe the content of a document without requiring a specification of the representation. In a second step, the graphical representation of the data is specified in respective CSS/XSL files and subsequently integrated into or referred to by the HTML/XML documents. The strict separation between structure and layout has increasingly gained importance lately, since a user can access WWW documents from many different web-enabled devices, such as desktop PCs or smartphones. In this

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connection, the display formats of the different device classes differ considerably, for instance, the display of a smartphone is much smaller than that of a usual desktop PC. The separation between format and layout takes account of this circumstance and enables to create a specific layout for each device without having to repeatedly edit content. All of the formatting or markup languages discussed have an own syntax, which is a system of rules that helps to create well-formed expressions for formal representation. The basic setup of the HTML and XML syntax is very similar. Both languages use different elements to structure the content. A special feature of these languages is that all elements with a few exceptions regarding HTML need to be opened at one point () and then closed again (). Figure 5.5 illustrates the general structure of a HTML and XML document.

HTML-Document

Title, meta information, style information, skript,….

Text, links, tables, images, form checkboxes, ….

XML-Document

0123456 BlueRay Player ABC 249.99 1

87654 Doe, Jane Freiherr-vom-Stein Str. 2, 67346 Speyer

Fig. 5.5 Structure of syntax of a HTML and XML document. Source: Wirtz (2013a, 2020b)

Languages for developing client-side dynamic WWW documents are, for instance, JavaScript, Visual Basic Script, or Dynamic HTML (DHTML). However, with regard to client-side scripting languages, only JavaScript has been widely accepted as de facto standard. JavaScript offers the opportunity to create user interaction within a website and to generate or reload content. The syntax is similar to those of the programming languages C or Java, although the critical programming concepts such as the object orientation of JavaScript have a different design. The most common languages with regard to server-side dynamic WWW documents are Hypertext Preprocessor (PHP), Common Gateway Interface (CGI), Active Server Pages (ASP), as well as Java Server Pages (JSP). Here, PHP has become most prevalent as de facto standard. Accordingly, about 82.4% of all websites use PHP as server-side programming language (W3Techs 2016). This

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large market share especially results from the open-source PHP license, the broad database support, as well as the high accessibility of various function libraries. PHP, influenced in its syntax by C and Perl, enables to apply imperative and objectoriented programming paradigms. In addition to the above-mentioned basic technologies, there are several extensions or combinations of these technologies. An example of such a combined technology that has increasingly gained in importance in the context of the Web 2.0 or social media is the Asynchronous JavaScript and XML, or abbreviated AJAX, which is a combination of JavaScript and XML that asynchronously transfers data between the server and client (browser). This asynchronous data transfer or application of AJAX allows creating the “look and feel” of a classic desktop application for a website. In this connection, the website does not completely reload but only changes at relevant positions. After the website has completely loaded for the first time, the AJAX engine takes over the client-side processing and enables further access to the server. Figure 5.6 depicts the operating principle and schedule of an AJAX application.

Asynchronous JavaScript and XML (AJAX) 1 Initial page request via browser

2

Provided HTML/ XML page by server

Client (Browser) Smartphon e, Tablet, Windows

Server Request object: verified client data Response object: Client response buffer and transaction management

Ajax Engine

3

JavaScript Call

SP*

Time

HTTP Request

Updated XML Data Data exchange

Updated HTML + CSS

HTTP Request SP*

User Interface

Updated HTML + CSS

Client-Side Processing

JavaScript Call

Database

Updated XML Data

JavaScript Call HTTP Request SP*

Updated XML Data Updated HTML + CSS

* SP = Server-side processing

Fig. 5.6 Operating principle and schedule of an AJAX application. Source: Wirtz (2013a, 2020b)

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Besides AJAX, another frequently used technology in the context of Web 2.0 and social media are web services (see for the following Cao et al. 2013). Users can access web services via well-defined interfaces. Particularly the mashup method commonly used in the context of Web 2.0 is realized by means of a web service. In this connection, the term mashup refers to integrating external services in an own platform or more general to supporting the interplay between different application programs (Satti et al. 2016). To access a web service requires that a service provider has made it public in advance. For this reason, the service provider makes a description after building the actual web service by using the Web Services Description Language (WSDL) and defining the interface of the service. WSDL is a meta language that expresses the offered data, types of data, functions, and exchange protocols (Yue et al. 2004). Following this, the service provider registers the interface or description of the web service at a so-called service broker, which is a standardized directory service, also called Universal Description, Discovery, and Integration Registry (UDDI Registry) in the context of a web service. The directory service contains information about the identity of the service provider, the categorization, as well as a detailed description of the interface of the service. If a user needs a specific service, he or she sends a request to the service broker, searches the directory, and selects a service that fits the respective demands. For instance, multiple web services may cover or answer the query “weather New York.” In this case, the user can make a choice and then receives the address of the selected web service from the service broker. After having found an appropriate service through the service broker, the service directly turns to the respective service provider. In this connection, the exchange of data also takes place through standardized protocols. More specifically, the Simple Object Access Protocol (SOAP) or the Extensible Markup Language Remote Procedure Call (XML-RPC) initiates or performs the data exchange. Figure 5.7 illustrates the process and operating principle of a web service. Registration 2





Interface (WSDL)

Service Broker (UDDI-Registry)

1 Address of Web Service

4

3

Description

Request

Service Provider

5 Selection (SOAP/XML-RPC)

Web Service

Service User

Fig. 5.7 Operating principle of a web service. Source: Wirtz (2013a, 2020b)

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Web services not only increasingly gain in importance in the special context of Web 2.0 and social media but also within the scope of digital business application systems (Lippert and Govindarajulu 2015). For instance, in the course of e-procurement, the procuring company and the supplier can establish an automatic machine-to-machine communication by means of a web service. Compared to before, where suppliers had to transfer orders to different application systems by hand, the web service can automate this process step now. This brings along considerable gains in efficiency and significantly reduces the susceptibility to errors.

Digital Business Architectures Modern digital business architectures are composed of many different application systems. Depending on the type of business relation (e.g., B2C or B2B), many different technologies may be applied. In the B2C context, usually traditional Internet technologies are used. A customer connects to the Internet via an Internet service provider, searches for information or products, and thus makes contact with a company. These companies are also connected to the Internet via an Internet service provider and supply information usually by means of an own web server. Modern companies that focus on digital business not only provide static information but also enable a dynamic interaction and a possibility to order products via the Internet. In addition to a web server, the internal IT infrastructure therefore often comprises further application servers, database servers, and other back-end systems. These systems are connected to a company’s internal production of goods and services or value chain. In the B2C context, both companies use further technologies in addition to those application systems mentioned above, in order to enable business partners to make transactions efficiently. The above-mentioned web services are often used as interfaces to transfer data beyond corporate boundaries. Moreover, companies use electronic data interchange (EDI) to integrate business processes and data across company boundaries. Within this standard, the data are usually transferred by means of XML or a special EDIFACT (electronic data interchange for administration, commerce, and transport) message. In addition to the mere transfer of data, a company can also get complete IT services from a provider. These services are provided dynamically and demand-oriented via a network or the Internet. The technical infrastructure of the IT provider is not accessible for the demanding company. In order to electronically exchange data and information, as well as to electronically describe the flow of goods between companies, the latter often apply technology of radio-frequency identification (RFID). Along the entire logistic supply chain, RFID can capture the movement of goods without contact. The goods are equipped with small transponders (tags) that contain a microchip and antenna. These tags can be read without contact by means of electromagnetic waves and be captured in the companies’ information systems. Figure 5.8 presents a cross-company digital business architecture by way of example.

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Client (Consumer)

ISP

ISP

• PC • Laptop, netbook • Smartphone •… Company A Back-End Systems

Database Server

Application Server

Web Server

Databases

CRM/ERP System

Distribution

Production

Web Services

EDI

Back-End Systems

Finance and Accounting

Database Server

Procurement

…

RFID

Cloud Computing Application Server

Web Server

Databases

CRM/ERP System

Production

Finance and Accounting

Procurement

Company B

Fig. 5.8 Example of a digital business architecture. Source: Wirtz (2013a, 2020b)

…

5.2 Technology at the Human-Machine Interface

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Technology at the Human-Machine Interface

The ongoing digitization of all areas of business and life is leading to an omnipresent confrontation with modern information and communication technologies and computer-based machines and systems. This merging of human and machine or technology leads to a special emphasis on interaction at the human-machine interface in the context of digital business This chapter deals with essential basics in connection with information technology applications at the human-machine interface in digital business. At first, the chapter illustrates important historical events of the human-machine interface. It then describes essential dimensions and aspects of the human-machine interaction before presenting central success factors with regard to the design and configuration of the human-machine interface.

Historical Development of the Human-Machine Interface Until 2000 The development of the human-machine interface looks back on a long history. Already in the Stone Age around 300,000 to 3000 BC, humans interacted with physical machine-like objects, especially in the form of tools and weapons made of wood and stones, such as bows and arrows, which can be regarded as functional precursors of machines. While these interactions were characterized by manual user interfaces, over time advanced technical inventions or machines emerged that could be operated not only by hand but also by foot. Besides these dominant haptic user interfaces, occasionally mechanical devices with a visual user interface were developed. In the period from 3000 to 800 BC, inventions such as the wheel, the potter’s wheel, the plough, the loom, and the compass were of particular importance in this context. Later on, important technical inventions became mechanically more and more sophisticated and powerful. However, the basic haptic or visual user interface of these interfaces was only slightly modified or refined. From 800 B.C. to 500 A.D., mechanical devices such as the pulley, the catapult, and the water wheel are particularly noteworthy. From 500 to 1500 A.D., inventions such as the mill, the treadle loom, and the tribrach had significant impact on humanity. In the fifteenth to sixteenth century, the printing press, clocks, telescopes, rifles, and cannons followed. Figure 5.9 shows central aspects and milestones in the development of the human-machine interface from the Stone Age to the Renaissance.

3.000 B.C.

1500 A.C. until 1600 A.C.

In the 15th century, the multiplication of texts is revolutionized by the printing of books; in addition, there have been clocks, telescopes, rifles and cannons

The techniques developed further to mills, treadle loom and tribrach

500 A.C.

Fig. 5.9 Development of the human-machine interface (Stone Age to Renaissance). Source: Wirtz (2020b)

800 B.C.

Around 800 BC, they began to use of pulleys, catapults and water wheels

5

The first wheels, pottery wheels, ploughs and looms were developed from around 3,000 BC onwards

300.000 B.C.

In the stone age humans were using tools and weapons made of wood and stone (e.g. bow and arrow)

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In 1623, Wilhelm Schickard develops and builds the first calculating machine that allows not only adding and subtracting but also multiplying and dividing with the help of Napier’s calculating sticks. In 1700, Thomas Newcomen invents the first functioning steam engine. In 1728, the first mechanical looms with punch card control are built. In 1817, Karl Drais introduces the first running wheel as the basis of today’s bicycle. The year 1837 marks a first important milestone in the history of the computer with the concept of the analytical engine developed by Charles Babbage. This was the first calculating machine for general applications. The user interface is characterized by punch card-based input of data or programs. In 1861, Philipp Reis invents the telephone and loudspeaker, or rather the first functioning speech connection, creating a new type of interface, the auditory-verbal user interface. Other important technical inventions up to the end of the nineteenth century include the first typewriter ready for series production by Rasmus Malling-Hansen in 1865, the microphone by Emil Berliner in 1877, the modern automobile by Carl Benz in 1886, the first data processing system based on punch cards by Herman Hollerith in 1888, and the cathode ray tube as the technical basis for television by Ferdinand Braun in 1897. Figure 5.10 illustrates central aspects and milestones regarding the evolution of the human-machine interface from the seventeenth to the nineteenth century.

7 1 2 3 4 5 6 7 8 9

Brett

1728

Thomas Newcomen invents the first steam engine

1700

1861

1865

1877

1888

1897

Invention of the cathode ray tube by Ferdinand Braun

Herman Hollerith works on the punch card based data processing system

1886

The first modern automobile is built by Carl Benz

The microphone is invented by Emil Berliner

Rasmus MallingHansen builds the first productionready typewriter

Philipp Reis develops the telephone and the loudspeakers

1837

Charles Babbage designs the analytical engine

Karl Drais develops the preliminary stage of the bicycle, the walking machine

1817

The first mechanical looms with punch card control

5

Fig. 5.10 Development of the human-machine interface (seventeenth to nineteenth century). Source: Wirtz (2020b)

1623

Wilhelm Schickard builds a 4-function calculating machine with Napier's rake

1 4 2 1 2 8 3 5 4 2 4 9 56 6 3

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In the 1940s, Norbert Wiener establishes cybernetics as a general theory of the machine capable of learning to control and regulate itself. At the same time, the crucial development of computer-based machines and corresponding user interfaces begins. In 1941, Konrad Zuse invents the first fully automated, program-controlled and freely programmable computer with a punched tape reader and a keyboard. In 1946, IBM introduces the world’s first mainframe computer “ENIAC” (electronic numerical integrator and computer) with punched card-based data entry. In 1952, Kenyon Taylor invents the trackball, a computer-based input device that is considered the precursor of the computer mouse. In 1955, the Massachusetts Institute of Technology (MIT) invents the light pen, a computer pointing device for the screen. In 1957, Morton Heilig presents the first virtual reality application “Sensorama” that combines a visual 3D representation with auditory, olfactory, and haptic perceptual stimuli. The first graphic computer system with a light pen as an input device is developed by IBM and GM as part of their DAC-1 (design augmented by computers) project in 1958. In the same year, the first video game “Tennis for Two” by William Higinbotham with two boxes and knobs as input devices is released. In addition, the first complete implantation of a pacemaker in a human is achieved in 1958 by the physician Åke Senning and the engineer Rune Elmqvist. While text-based interaction via command line interface (CLI) is introduced in 1960, IBM presents the first digital speech recognition tool IBM Shoebox in 1961. In 1963, Douglas C. Engelbart presents the first computer mouse. One year later, Donald L. Bitzer and H. Gene Slottow build the first working plasma screen. In the same year, Ivan Sutherland introduces the first virtual reality system with headmounted display. Figure 5.11 shows central aspects and milestones in the development of the human-machine interface from 1940 to 1970.

1946

IBM and GM build the first graphic computer system with light pen

1958

1960

1961

1963

1964

Donald L. Bitzer and H. Gene Slottow design the plasma screen

Douglas C. Ivan Sutherland Engelbart builds presents a virtual the first computer reality system mouse with headmounted display

Development of the IBM Shoebox, a digital speech recognition

Introduction of textbased interaction through command line interface

Implantation of the first pacemaker in Stockholm

Fig. 5.11 Development of the human-machine interface (1940–1970). Source: Wirtz (2020b)

Presentation of the first video game "Tennis for two" by William Higinbotham

1957

Virtual reality application "Sensorama" is presented by Morton Heilig

1955

Invention of the light pen at MIT

1952

Kenon Tayler develops the trackball as a precursor of the computer mouse

5

The ENIAC mainframe computer with punch card based data entry is presented by IBM

1941

Konrad Zuse invents the fully automatic, program-controlled and freely programmable computer

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In 1974, Sam Hurst develops the first touchscreen with a transparent surface. A year later, in 1975, the first graphical user interface (GUI) with icons and pop-up menu is developed at the Xerox PARC. In 1977, the cochlear implant, a hearing prosthesis developed by Ingeborg Hochmair and Erwin Hochmair, is implanted in a human body for the first time. In 1981, this first graphical user interface and other corresponding developments culminate in the first commercial computer system, known as Xerox Star. In the same year, IBM introduces the first personal computer. In 1984, Bob Boie develops the first transparent multi-touch screen, and George Gerpheide invents the touchpad in 1988. In the same year, Lawrence Farwell and Emanuel Donchin develop the first brain-computer interface. The implementation of the World Wide Web (WWW) in 1990 by Tim BernersLee and Robert Cailliau represents another outstanding milestone in the development of computer-based machines and corresponding user interfaces and is an essential starting point for the later development of wireless interfaces in humanmachine interaction, such as Bluetooth and WLAN. In 1991, the “Digital Desk” is released as one of the first augmented reality applications that combines a multitude of innovative visual and haptic interaction elements. In the same year, Mark Weiser presents the concept of ubiquitous computing, which emphasizes the omnipresence of data processing and initially manifests itself in the following years through the introduction of personal digital assistants (PDAs). Against the background of these developments, the 1990s are particularly characterized by the development of user interfaces for mobile devices. In addition, brain pacemakers are used for the first time in the medical field in 1998 to improve motor skills for Parkinson’s patients. These pacemakers are connected to the human brain through depth electrodes. In the same year, AI researcher Kevin Warwick becomes the first person to have an RFID microchip implanted under the skin, enabling him to open his door locks, switch on his computer, or switch on his lights. Figure 5.12 shows central aspects and milestones in the development of the human-machine interface from 1970 to 2000.

1975

Introduction of the first commercial computer system Xerox Star and the first IBM personal computer

1981 1984

1988

Invention of the touchpad by George Gerpheide

First brain-computer interface is developed by Lawrence Farwell and Emanuel Donchin

Development of the first transparent multitouch screen by Bob Boie

Fig. 5.12 Development of the human-machine interface (1970 to 2000). Source: Wirtz (2020b)

1977

Construction of the first hearing prosthesis for the deaf (cochlear implant)

1998

Introduction of electrodes that improve the mototrics of Parkinson's patients

Concept of Ubiquitous Computing by Mark Weiser and development of Personal Digital Assistants (PDA)

1991

Implementation of the World Wide Web by Tim Berners-Lee and Robert Cailliau

1990

Construction of the "Digital Desk" as one of the first augmented reality systems by Pierre Wellner

5

Introduction of the first graphical user interface with icon icons and popup menu

1974

The first touch screen is built by Sam Hurst

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Recent Developments of the Human-Machine Interface The turn of the millennium was the starting point for the increasing introduction of natural user interfaces (NUI), focusing on the interpretation of human body language. In 2002, for instance, the US company VeriChip Corporation launches the first RFID microchip for humans. In 2003, Sony introduces a camera with microphone called EyeToy for PlayStation 2, which records the body movements of PlayStation players and integrates them into the game. In 2005, the company Nintendo launches Wii Remote, a remote control for its eponymous game console Wii, which enables more intuitive game control based on the arm movements of the player. In the same year, scientists at the University of Michigan develop an artificial inner ear on a microchip for deaf people. In 2007, electronically controlled orthoses for paralyzed limbs such as knee joints were introduced. With the introduction of the iPhone by Apple in 2007, the concept of multi-touch operation is also widely used for the first time. In 2009, Microsoft introduces its Kinect hardware for controlling the Xbox 360 game console, which combines a variety of innovative user interfaces and enables motionbased game control in addition to visual and auditory/verbal interaction mechanisms. In 2010, Apple’s iPad becomes the first tablet PC with multi-touch control. In 2011, Apple launches Siri, the first widely used intelligent voice assistant, which becomes an integral part of the iPhone and iPad within their device control system. In the same year, the company Second Sight Medical Products introduces the Argus II retinal prosthesis, the first electronic visual prosthesis. In 2012, Google releases its augmented reality glasses Google Glass, which can be operated via motion, speech, and eye control by providing several innovative user interfaces. In 2015, the Defense Advanced Research Projects Agency (DARPA), a research center of the US Department of Defense, develops an artificial hand with a sense of touch and feel. In 2016, Sony presents the Sony Concept N, a smart collar that is considered a potential successor technology to the smartphone. The collar has Internet access and a digital assistant and can be controlled via an intelligent auditory-verbal user interface. In 2018, the US research initiative BrainGate Research transplants brain implants into a human being for the first time. These implants allow an individual to operate apps, surf the Internet, and send text messages via thought control. Given the recent developments in the field of human-machine interaction, it can be stated that the trend in recent years has tended to move away from graphical or visual user interfaces toward text- and language-based control elements (conversational user interface—CUI). At the same time, the next development phase in the very dynamic field of human-computer interaction with the expected focus on virtual and augmented reality and the brain-computer interface is already imminent. Figure 5.13 shows central aspects and milestones with regard to the development of the human-machine interface since the year 2000.

2003

2010

Apple produces its first iPad

2009

Electronically controlled orthoses for paralyzed limbs are developed

2007

2012

The first electronic visual prosthesis is introduced

2011

Fig. 5.13 Development of the human-machine interface (since 2000). Source: Wirtz (2020b)

Nintendo builds a remote control for video games, the Wii Remote

2005

Development of the inner ear on a microchip for the deaf

2016

Construction of the smart collars Sony Concept N begins

In the USA, the first artificial hand capable of feeling is constructed

2015

The first augmented reality glasses are introduced

2018

Diffusion of Virtual and Augmented Reality

2020

Development of the Conversational Interface (CUI) technology

5

The first RFID chips for humans are constructed

2002

Game control via the eyes by Sony EyeToy

Apple makes Multi-Touch control widely available by introducing the iPhone

Microsoft develops Kinect, a motion and voice based video game Siri by Apple is controller for the the first widely Xbox 360 used language assistant

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Human-Machine Interaction and Configuration After illustrating the development of human-machine interaction, the following section describes its main dimensions and aspects. The human-machine interaction can be explained by means of the human-machine interaction model (HMI model). The HMI model comprises five central layers: (1) the human, (2) the input level, (3) the interfaces, (4) the machine (hardware), and (5) the software. The starting point of human-machine interaction is the human being. The human brain and sensory organs enable humans to interact not only with humans but also with machines. The sensory organs can function both as sensors and as actuators. The sensors primarily relate to the human senses of seeing, feeling, as well as hearing and enable the perception and sensing of impulses and information emanating from the machine. At the same time, the sensory organs also serve humans as an actuator to send impulses and information to the machine in the form of sight, touch, and speech. The transmitted impulses and information represent the input of the interaction, which are transformed into a different output in order to achieve a desired outcome. However, this process always requires an interface that mediates between human and machine. For example, a human can interact with a computer using his sense of touch and physical strength (input) by pressing buttons and keys (interface). These input actions result in the provision of the desired information or in the execution of actions (output). The interface represents the vehicle of interaction between human and machine and requires human control. The interfaces themselves can be divided into three main categories based on human sensory functions: visual, haptic, and auditory-verbal interfaces. Visual interfaces include smartphones and tablet displays, monitors, head-mounted displays, holograms, and cameras. The haptic interfaces are, for instance, knobs, buttons, levers, touchpads and touchscreens, keyboard and mouse, gamepads, joysticks, remote controls, as well as sensors and electrodes. The auditory-verbal interfaces especially comprise loudspeakers, headphones, microphones, and antennas. By means of these interfaces, humans can control machines and ensure the mutual exchange of impulses and information. The machine or hardware (in the case of data processing systems) has a processor or central processing unit (CPU) and control unit (CU) that control the sequence of instruction processing within the machine. In principle, the processor together with potentially applied software takes over the function of the brain in machines. The software also includes aspects relating to the interfaces and the input level. For instance, there is facial recognition software, graphics and monitor drivers, and specific audio and video software.

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Against this background, the M2M (machine-to-machine) interaction, which is also controlled by processor and software via the respective IT interfaces, represents an important aspect. Here, sensory or electronic impulses and data are exchanged between two or more machines. Machines in the digital business area can be divided according to the underlying character of the business relationship: on the one hand, there are B2C (business-toconsumer) relationships, and on the other, there are B2B (business-to-business) relationships. Well-known examples of machines in the B2C sector include game consoles, televisions, telecommunications equipment, and smart home devices. Machines in the B2B area comprise, for instance, industrial robots, switchgears, laser systems, or other industrial machines. In between, there are some important machines that are relevant in both sectors. These include smartphones, tablets, notebooks, desktop PCs, and smart cars. Figure 5.14 summarizes the HMI model of human-machine interaction.

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Human Human Brain

Sensory Organs

Sensors

Seeing

Feeling

Seeing

Listening

Actuators

Feeling

Speaking Speakin

Input Level Electronic Impulse Control

Touch Control

Gesture/Motion Control

Gaze Control

…

Interfaces Visual

Auditive-verbal

Haptic

Smartphone-/ TabletDisplay

Touchpad/Touchscreen

Microphone

Monitor

Keyboard/Mouse

Speakers

Head-MountedDisplay/Hologram

Gamepad/Joystick/ Remote Control

Headphones

Camera

Sensors/Electrodes

Antenna

…

…

…

Machine (Hardware) CPU (Central Processing Unit) and CU (Control Unit)

B2C Area

B2B Area

Game Console

Smartphone/Tablet

Industrial Robots

Television

Notebook

Switchboards

Telecommunication System

Desktop PC

Laser Systems

Smart Home Devices

Smart Car

Other Industrial Machinery

…

…

…

M2M Electronic/Sensory Impulses Data

Fig. 5.14 HMI model of human-machine interaction. Source: Wirtz (2020b)

Software (Face Recognition Software, Graphics Drivers, Monitor Drivers, Audio and Video Software etc.)

Voice Control

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Success Factors of Human-Machine Interaction Within the framework of human-machine interaction, four essential success factors can be specified with regard to the design and configuration of the interface. These success factors are shown in Fig. 5.15.

Ease of Use of the H2M Interface • Efficiency and accessibility of the interface • Intuitive handling and consideration of cognitive aspects • Intelligent automation and variable interaction capability • Simplicity and time advantages for the user Personalization/Individualization of the H2M Interface Configuration

Safety and Reliability of the Interface • Functional safety and reliability • Data security and protection of privacy and company data stocks • Resistance against manipulation and cyber attacks

• Individual user interfaces H2M Interface Design and Configuration

• Personalized/individualized ability to interact • Creation and consideration of user profiles and user histories

• Connection stability and performance

Networking and Integration Capability of the Interface Solution • Integrative linking of different functions, impulses and information (multiple interface solution) • Integrated service interface offering • Horizontal and vertical integration capability of the interfaces

Fig. 5.15 Success factors of H2M interface design and configuration. Source: Wirtz (2020b)

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The user-friendliness of the H2M interface constitutes the first central success factor. In this context, the efficiency and accessibility of the interface is important in order to achieve the best possible adaptation to humans. The user-friendliness is also characterized by an intuitive handling of the interface as well as by the integration of cognitive aspects throughout the design of the interface. Another important aspect in this context is intelligent automation, especially in combination with a variable interaction capability of the machine and its interfaces. The interaction capability of the machine and its interfaces should not only interact uniformly but should also adapt their interaction to different conditions. After all, ease of use means simplicity and time advantages for users. Another success factor in the context of human-machine interaction is the personalization/individualization of the H2M interface. In addition to individual user interfaces, which are geared to the needs and preferences of the user, the personalized/ individualized interaction capability of machines and their interfaces are core aspects in this context. Another important aspect relates to the creation and consideration of user profiles and user histories through machines and their interfaces. In addition, the networking and interaction capability of the interface solution is also a central success factor. This is primarily reflected in the integrative linking of different functions, impulses, and information in the sense of a multiple interface solution. In addition, an integrated service interface offer and the horizontal and vertical integration capability are also crucial factors for the success of humanmachine interactions. The final success factor of H2M interface design and configuration is the security and reliability of the interface. In addition to functional security and reliability, data security and the protection of privacy or company data are of special importance for success. In order to achieve this, a certain degree of robustness against manipulation or cyber-attacks is required. After all, the performance and stability of the connection between humans, interfaces and machines is a key success factor, in particular with regard to functional reliability. The example of human-machine interaction is a particularly good illustration of the outstanding importance that the topic of security has gained in digital business in recent years. The following section therefore describes this aspect in more detail.

5.3

Security in Digital Business

The ongoing penetration of modern information and communication technologies in all areas of the economy and everyday life together with the growing network complexity of the associated digital business systems and data increases the importance of cybersecurity. Potential security threats increasingly endanger economically and socially critical infrastructures, thereby affecting people and their personal privacy. This chapter describes the fundamental principles of security in digital business. First of all, a cybersecurity framework is presented, which maps the central risks and resources regarding security in digital business. In addition, the main security

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objectives and digital business security tools are discussed, with a special focus on cryptography and blockchain technology.

Cybersecurity The security and reliability of electronic transactions has steadily gained in importance in the literature and practice in recent years (Wirtz and Weyerer 2017b). Besides the increasing network complexity of IT applications and systems and the associated data, the main reasons for this development are the growing number of cyberattacks and data scandals in recent years. It is particularly noteworthy that cyberattacks have both increased in frequency and become more complex, professional, and focused (Wirtz and Weyerer 2017a). Especially in the context of digital business and the increasing relevance of e-commerce, security is an important determinant for customers’ trust. In this regard, information technology in general and computer networks in particular are subject to a variety of dangers or threats (Schneider 2017). The condition of cybersecurity can be described by means of the risk-resource cybersecurity framework that compares risks and resources as two opposing components essential to cybersecurity (Wirtz and Weyerer 2017b). In the context of risks, cyberattacks and their relevance as a key indicator of the current state of cybersecurity represent a central threat to cybersecurity. Another significant risk factor relates to organization-related activities such as the granting of system authorizations or the outsourcing of activities to private providers. Since organizations are characterized by different requirements for cybersecurity, the degree of potential danger also plays a central role in describing the condition of cybersecurity. Another important factor with regard to cybersecurity risks comprises the concerns of IT experts, customers, and citizens. Furthermore, the lack of risk awareness by top management or superordinate organizational units also represents a risk factor for cybersecurity. In terms of resources, protective measures constitute a central factor of cybersecurity. These can be seen as a counterpart to cyberattacks. Protective measures against cyberattacks include technological tools such as encryption technologies or antivirus software as well as non-technological measures such as access controls or security-related staff training. Emergency management is another important resource factor in the case of failure of the corresponding safety measures. Emergency management involves the development and application of action plans to reduce vulnerability to threats and to manage the consequences of cyberattacks and potentially resulting disasters. In addition, the professional experience and expertise of an organization’s IT staff is an important resource in the context of cybersecurity. After all, successfully managing complex cyberattacks and maintaining cybersecurity require a high level of IT expertise. Moreover, resource support from top management or upper-level organizational units also represents a significant resource in terms of cybersecurity and the security of information systems. Figure 5.16 illustrates the risk-resource cybersecurity

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Resources

Risks Relevance of cyberattacks

Security measures

Potential hazards Emergency management

Degree of hazard potential

Factors of Cybersecurity

Security concerns

Professional experience and expertise

Lack of risk awareness of the top management or the upperlevel organizational unit

Resource support by the top management or the upper-level organizational unit

Fig. 5.16 Risk-resource cybersecurity framework. Source: Wirtz (2020b)

framework including the central factors of cybersecurity (content based on Wirtz and Weyerer 2017b).

Typical Threats in Computer Networks This section describes the dangers illustrated in the risk-resource cybersecurity framework, before presenting security objectives and measures. In information technology in general and in computer networks in particular, there are various dangers and threats. The main threats in computer networks or in the Internet include unauthorized access, data loss and manipulation, as well as data and identity theft. Customer or internal company data must be protected and not publicly available (Turban and Sipior 2015). However, often unauthorized persons such as hackers try to obtain confidential corporate or customer data via the Internet by illegally gaining access to the servers of companies. Once a hacker has gained access to a company’s server, he or she can steal or manipulate the data. If a hacker only wants to draw attention to security vulnerabilities, he or she can send the data to the affected company or the press or may publish them directly on the Internet. If a hacker pursues financial goals, then he or she may sell the data obtained or modify it in a way that benefits him or her. In addition to data theft, identity theft may also occur in the context of digital business. Here, a hacker takes over another person’s identity or pretends to be this person in order to gain access to data or to benefit financially. In doing so, someone could gain unauthorized access to other people’s goods or money on Internet platforms like eBay or Amazon. Another danger on the Internet or in computer networks is data loss, which may be caused intentionally by a hacker or occur through hardware damage. All these risks need to be considered in digital business application systems (Chaffey 2015). Table 5.2 presents the most important threats that may occur in computer networks (content based on Wirtz 2013a, 2020b; Chaffey 2015).

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Table 5.2 Threats in computer networks Type of Attack Malware

Threat Virus

Worm

Spyware/Adware

Scareware

Dialer

Trojan

Attacks on IT Infrastructures

DoS Attack/ DDoS Attack

Scanner

Interception, Reading, and Manipulation of Data

Sniffer

Keylogger

Password Cracker

Description A virus is an integrated code in a (host) program that can reproduce itself and can manipulate system environments or data unnoticed. A worm is an independent program that can spread and reproduce itself. In contrast to a virus, it does not require a host program. Spyware/adware is a spy program that sends user data to the programmer/producer without the users’ notice and consent or unwantedly offers them products. Scareware leads the user to believe that his or her computer is broken or was compromised. Subsequently, it offers the user to eliminate the danger by asking for a payment. A dialer establishes a dial-up connection to the Internet (via modem/ISDN) and is a form of malware if it establishes a connection to a very expensive fee-based number. Trojans or Trojan horses are computer programs that give the impression of being useful applications but actually fulfill another or malicious function. A denial-of-service attack intentionally causes an overload of a system or a network in order to temporarily limit the availability of one or multiple services. If the attack comes from different systems, it is a called a distributed DoS attack. A scanner systematically screens systems for security vulnerabilities (such as unsecured network ports) in order to attack them through the detected loophole. A sniffer not only allows to intercept and record data packets in networks but also to analyze them subsequently. Sniffers are applied in the context of network analyses but can also be used for abuse purposes and for unauthorized data reading. Keyloggers record all user inputs (keyboard) and save them or send them to third parties. In this way, for instance, hackers can gain access to passwords or pin numbers. Password crackers are programs that allow to bypass access barriers. In this connection, they differ with regard to the selected method; often the so-called dictionary or brute-force attack (testing all possible combinations) is applied. (continued)

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Table 5.2 (continued) Type of Attack

Threat Man-in-theMiddle Attack (snarfing)

Phishing

Identity Theft/ Deception

Spoofing

Social Engineering/ Social Hacking

Description In the case of the man-in-the-middle attack, an attacker logically interposes himself or herself between two communication partners. Here, the attacker can control and arbitrarily look at or manipulate the data traffic between the communication partners. In the case of phishing, a hacker tries to imitate a trustworthy website (e.g., online banking) and to prompt a user by means of a faked message to reveal sensitive or access data. Spoofing generally refers to disguising one’s own identity. There are many different types of spoofing. In the case of IP spoofing, for instance, a hacker modifies all IP packets with a faked sender IP and creates the impression that the packets are sent from another computer. Moreover, DNS, mail, mac, and DHCP spoofing, etc. are commonly used. Social engineering refers to spying out a user’s personal environment and faking an identity through this information. This personal identity is used in the context of social hacking to look at private data.

Source: Wirtz (2013a, 2020b)

When planning a digital business application system, these potential threats need to be adequately considered. In order to design a basically “safe” application system, the following six fundamental security objectives need to be accomplished: confidentiality, integrity, availability, non-repudiation, authenticity, and reliability (von Solms and van Niekerk 2013). An application system is considered to be confidential, if information cannot be viewed by unauthorized persons, entities, or processes. One can realize confidentiality, for example, by means of an encryption or allocation of special access rights. Integrity prevails as long as no unauthorized person changes data (data integrity) and application systems are available with the desired performance or intended range of functions (system integrity). A system is available in terms of security if neither its function nor its accessibility has been affected in an unauthorized manner. In addition to availability, liability is an essential part of Internet security. If a communication link can be verified without any doubt and cannot be denied, one speaks of a binding communication. Particularly relevant here is that the entities (systems/user) involved can be clearly identified or assigned to individual actions or processes (Chaffey 2015). Authenticity is present if one can ensure without any doubt not only the entity in terms of a user name or computer but also a person’s actual identity. Implicitly, authenticity represents the prerequisite for binding communication. The last security objective of reliability requires that all data and systems provide

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consistent and desired functions. In the context of digital business and electronic transactions, one can derive four basic determinants from these security objectives. A reliable transaction requires ensuring mutual identification in order to guarantee the commitment of the transactions. Moreover, one has to ensure the integrity of a transferred message, for instance, of an order so that the intended order matches the actual one. Furthermore, the communication or transaction should only be visible for the business partners involved in order to guarantee confidentiality. Finally, the issue of non-repudiation is highly relevant since it is the only real way to ensure commitment. All business partners not only need to be completely sure about the identities of the others but also the content of the contract in order to assert legal claims, if necessary.

Cryptography Within the scope of information technology, there are different procedures and methods to implement the above-mentioned security objectives in the application systems. From the large spectrum of digital business security instruments, the following section takes the two instruments encryption and the use of a firewall as examples and presents them in more detail (Papazoglou and Ribbers 2006). In practice, one uses encryption methods to ensure the confidentiality of the communication. In the context of information systems and with regard to cryptography, i.e., the encryption of information, one can distinguish between two basic methods: a symmetric and an asymmetric procedure. In the case of the symmetric procedure, the sender encodes a message by means of a certain key. With the aid of an algorithm and the corresponding key, a plain text message turns into an incomprehensible encrypted message. If the receiver of the message knows the secret key, he or she can decode the message by means of the algorithm and key. In the case of the symmetric procedure, both communication partners need to know the secret key and the algorithm used. In contrast to symmetric encryption, asymmetric encryption uses two keys. In addition to the secret key, anyone can download a public key via the Internet that is clearly associated with a certain person. In other words, if somebody wants to make sure that only a specific person can read the message, he or she has to use the asymmetric encryption and encode the message by means of the public key of the communication partner. A person can then only decode the message with a secret key that only the sender knows. One can also use the asymmetric procedure in a modified way for digital signatures. Here, however, the order of the applied keys has changed. First, one uses a secret key for encoding and then decodes the message by means of a public key. The digital signature assures the receiver of the message that the electronic message really comes from the respective communication partner, who is the only person that has access to the secret key. Figure 5.17 depicts the functional principle of symmetric and asymmetric encryption.

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Symmetric Encryption

Order ABC….

A

1

Encode Plaintext

Secret Key Order ABC….

B

2

M⧫♦M● Bestellung ●◆◼ ABC…. ⑤ Encoded Message

Decode

Plaintext

Asymmetric Encryption

Order ABC….

A

1 Encode

Plaintext Public Key

M⧫♦M● Bestellung ●◆◼ ABC…. ⑤ Encoded Message

Order ABC….

B

2 Decode

Plaintext

Secret Key

Fig. 5.17 Functional principle of symmetric and asymmetric encryption. Source: Wirtz (2016b, 2020b)

Both the symmetric and the asymmetric procedures show some weaknesses or dangers. If communication, for instance, only takes place via the Internet, the key exchange between the communication partners is difficult under the symmetric procedure. Since one can record and intercept plain text messages on the Internet, exchanging the key is not reasonable in this way. The only way to securely transmit a key in the context of symmetric communication would be by means of a media disruption. In the case of asymmetric communication, the public key is used for encryption. Here, it is problematic that anybody could have sent the message and the identity of the sender is not guaranteed. Moreover, the identity of the receiver could also be fake. Thus, the sender needs to trust that the key, freely accessible on the Internet,

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really belongs to the respective person. Practitioners increasingly proceed to combine the symmetric and asymmetric encryption method, thus reducing the weaknesses of the individual procedures and increasing security, respectively. Popular methods for encrypted Internet communication are SSL/TLS (secure socket layer/transport socket layer), which use a combination of both procedures for secure Internet communication. Simplified, this procedure first authenticates the communication partners by means of asymmetric encryption and the exchange of the session key. Following this, communication or data exchange takes place by means of symmetric encryption. While the application of these different encryption procedures ensures confidentiality, the use of a firewall maintains data integrity. A firewall serves to restrict access to a network and monitors the incoming and outgoing data traffic (see for the following Papazoglou and Ribbers 2006). Based on predefined or set rules, the firewall decides whether to permit or to reject data traffic and thus can prevent undesired access to the network. In addition to these predefined rules, a firewall is basically guided by the addresses of the communication partners. In digital business, for instance, companies apply firewalls to protect their information infrastructure. While the firewall permits or redirects legal and desired access by customers, suppliers, or employees working from home, it blocks unauthorized communication attempts, for instance, by hackers. Figure 5.18 presents the functions of firewall.

Business Organization Web Server

Employees

Application Server

Employee (Home Office)

CRM/ERP System

Supplier (B2B)

Database Server

Customer (B2C)

Back-End Systems Databases

Fig. 5.18 Functions of a firewall. Source: Wirtz (2016b, 2020b)

Hacker

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Blockchain Blockchain technology is an encryption approach (cryptography) for the secure transmission of data. A blockchain is a growing list of data records, which are called blocks and linked by cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. The blockchain approach was developed by a person (or group of persons) under the name Satoshi Nakamoto invented in 2008, whereby the identity of Satoshi Nakamoto remains unknown (Nakamoto 2008). A blockchain database is managed autonomously via a peer-to-peer network and a distributed timestamp server. Once recorded, the data in a particular block cannot be changed retroactively without changing the subsequent blocks. Changing the subsequent blocks would require the consent of the network majority, which is highly unlikely. Although blockchain records are in principle not unalterable, blockchains can be considered very secure, since a widely distributed computer system can hardly be manipulated undetected by all users at the same time. The decentralized consensus on the correctness of the transactions is represented by a blockchain that is continuously expanded with each transaction (Herbert and Litchfield 2015). In principle, the first step is to initialize a specific transaction. In the second step, this transaction is mapped within a block. This block is then distributed to the network and the network participants. In the fourth step, the participants confirm the transaction, which serves as the basis for including the transaction in the blockchain. Accordingly, the fifth step integrates the transaction into the blockchain by appending the new block to the existing blockchain in a chain-like manner. In the last step, the respective transactions are executed and confirmed. Figure 5.19 shows the six steps of a transaction in the blockchain (content based on Der Digisaurier 2018; Jansen 2016).

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1

Initialization of the transaction

• • • •

Digital Business Technology and Regulation

Initiation of transactions Verification of transactions Permanent, transparent documentation of transactions …

2 • Depiction of the transaction in a block Representation • Preparation for block distribution of the transaction • … in a block

3

Distribution of the block to the network 4

Confirmation of the transaction

5

Attaching the block to a blockchain 6

Execution of the transaction

• Distribution of the block to all participants of the network • Visibility of the block by all network participants • …

• Confirmation of the transaction by participants of the network • Preparation of the integration of the transaction into the blockchain • …

• Chain-like linking of the confirmed transactions in a blockchain • Interval-type transaction generation by means of the blockchain • …

• • • •

Execution of the interconnected transactions Confirmation of the interconnected transactions Completion of the interconnected transactions …

Fig. 5.19 Transactions in the blockchain. Source: Wirtz (2020b)

This procedure enables participants to verify the correctness of transactions independently and relatively inexpensively. The use of a blockchain removes the property of infinite reproducibility from a digital asset. It confirms that each unit of value was transferred only once, which solves the long-standing problem of inexpensive duplication of digital products. Against this background, a blockchain is described as a value exchange protocol that can be used to transfer title rights such as securities or money. This feature made the blockchain the underlying technology of the cryptocurrency bitcoin, which became the first digital currency to solve the problem of reproduction without a trusted authority or a central server. Bitcoin relies on public registers (public ledgers) that record all transactions in the network. This allows bitcoin to be used as a payment instrument, on the one hand, and for investment purposes, on the other. The number of bitcoins is limited. The verification of bitcoin transactions involves the so-called mining by bitcoin miners. This process requires increasing computing power per additionally created bitcoin, resulting in a significant global

5.4 Digital Payment Systems and Applications

173

energy consumption comparable to the electricity consumption of entire countries such as Austria and Ireland (de Vries 2018). In return for the mining and the provision of the required computing power, the miners receive bitcoins. According to estimates by the University of Cambridge, there were between 2.9 and 5.8 million different users holding at least one unit of a cryptocurrency in 2017 (Hileman and Rauchs 2017). The price per bitcoin has risen significantly since its creation in 2009 and reached its previous high of 19,783.06 USD per bitcoin on December 17, 2017 (Morris 2017). Bitcoin has been criticized for its involvement in illegal transactions, high electricity consumption, price volatility, and stock market theft. Some economists, including several Nobel Prize winners, have considered bitcoin as a speculative bubble (Krugman 2018). In addition to its utilization as a payment instrument, the blockchain technology serves as the technological basis for smart contracts. Blockchain-based smart contracts are executed or enforced entirely or partially without human interaction. Economic transactions are typically based on bilateral or multilateral contracts whose enforcement depends on functioning institutional intermediaries. Thus, the concept of smart contracts is becoming increasingly important in the context of digital business. One of the main advantages of smart contracts is the deposit of automated instructions for concrete executions. For example, it can be used to create invoices that are automatically paid by the customer when a shipment arrives. Alternatively, it is possible to create securities that automatically pay dividends to their owners when profits reach a certain level (Franco 2015).

5.4

Digital Payment Systems and Applications

The growing number of Internet and smartphone users and the consequences of the financial crisis of the early twenty-first century have led to the digitization of various financial products. The digital transformation has affected all aspects of business including monetary transactions, which is of central importance for companies and still offers business potential and efficiency gains in the future. Despite the established forms of electronic payments by cards, the digital revolution has also given rise to new forms of payments such as micropayments, mobile payments, or blockchain-based transactions that, for instance, offer anonymous and yet secure ways of value dealings. Standard payment cards such as debit and credit cards have been issued since the late 1960s and are in use ever since (Wonglimpiyarat 2004). Some of them are also basis for today’s online payments but are incorporated in modern payment approaches such as mobile payments by Apple Pay or Google Pay.

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These new forms of digital payments are becoming more and more relevant for companies worldwide. Despite the increasing online commerce that is largely build upon online payment systems, the rise of mobile devices has also brought about an increasing use of mobile payment services. According to Statista’s FinTech Report 2020, the digital payment segment has a global transaction value of 3859 billion USD in 2019 (Statista 2020c). Due to its leading position in the field of digital payments, China is currently the largest market, with a transaction volume that reached 1596 billion USD in 2019. The United States is the second largest digital payment player in the world, and due to the high disposable income of the population, the country is the leader in the private financing segment regarding digital payment ventures.

Digital Payment Systems Digital payment systems can be categorized in different ways depending on various factors. Differentiating electronic payments by the transferred amount of cash brings about the concepts of macropayments (from approx. 5 USD) and micropayments (up to about 5 USD). There have also been strategies for very small amounts to bill certain online services, such as online journalism, and matching services. However, these business models have not been successful in the past due to a lacking willingness of online users to accept small payments (Mitchell 2007). Another differentiation is the one according to time. Digital payment systems can be categorized according to the billing time. There are systems that debit the customer account after the purchase transaction as well as systems that debit the customer account at the time of the purchase. Furthermore, there are credit-based payments. Moreover, electronic money and payment systems can also be differentiated according to hardware and software used, for example, categorization into specific hardware such as certain types of cards and respective reader, into software and API systems, or into certain types of electronic money. Since the established categorization of electronic payments is not suitable for a sufficiently adequate differentiation of common providers, a mixed form is required to present the full scope of digital payment systems. This scheme also incorporates the differentiation of real-world reference: while electronic payments only offered ways to handle cash payments electronically, online payments also include the transactions of various forms of electronic money and cryptocurrencies. Due to the increasing importance of mobile devices and thus the availability of near-field technologies such as NFC, Bluetooth, and QR code issuing displays, mobile payments are becoming increasingly important. Figure 5.20 illustrates this categorization of digital payment providers.

5.4 Digital Payment Systems and Applications

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Digital Payment

Pure Card Payments

Pure Mobile Payment

Digital electronic payment system by means of a physical customer card and a card reader

Digital payment system by means of mobile technology and respective mobile applications

Near Field Communication (NFC)

Credit Cards • • • •

Visa Card UnionPay Master Card … Debit Cards

• • • •

Google Pay Apple Pay Ali Pay …

Other Wireless Technologies

• Electronic Cash • Bank Cards •…

• PayPal (Bluetooth) • Google Pay (Bluetooth) •…

Prepaid

QR code for payment

• Cafeteria credits •… …

• Mi Pay •…

Online Payment Digital payment through online platforms by means of internet channels

Electronic Fund Transfer • Online SWIFT Transfers • PayPal, Amazon Pay • …

P2P Currency Transfers • TransferWise • CurrencyFair •… Alternative Currency Transfer • Bitcoin, Libra •…

…

…

Fig. 5.20 Digital payment systems

Digital electronic payment system are schemes that use means of a physical customer card and a card reader. Electronic money products are divided into hardware-based and software-based products, depending on the type of storage medium. In the case of hardware-based products, the storage medium is generally a computer chip, usually embedded in a plastic card, with access to the purchasing power protected by hardware-based security features. Hardware-based transactions include payments made over telecommunications networks using a card reader. Such systems can be categorized according to the functionality of the cards into credit cards, debit cards, and prepaid cards. Visa, UnionPay, and MasterCard are the two most prominent providers of credit cards worldwide (Nilson Report 2020). Debit Cards are cards that usually refer to a direct bank account. Prepaid cards are not necessarily connected to a bank account and hold a balance of cash for different companies such as transport services, cafeterias, etc.

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The pure mobile payment segment comprises transactions at points of sale (POS), which are processed via mobile device applications, so-called mobile wallets. Wellknown providers of mobile wallets are Apple Pay, Google Pay, or Samsung Pay. The payment process is triggered by a contactless interaction of the mobile app with a suitable POS terminal of the retailer. The data transfer can be initiated, for example, via the NFC (Near-Field Communication) radio standard, and Bluetooth or by scanning a QR code. Via the mobile wallet application, the user can pay the invoice amount of the purchase digitally by initiating an online transfer or using digitally deposited credit or debit cards as a payment instrument (host card emulation). Not included in the definition are payment transactions with physical debit or credit cards at contactless terminals or mobile POS systems (e.g., Square, SumUp) as well as location-independent carrier billing (online payment). With the rise of smartphones, mobile payment systems approaches are becoming increasingly popular for customers and businesses in everyday life. They can be separated in the use of technology. The most common approach is the Near-Field Communication (NFC) technology. NFC is an international transmission standard based on RFID (radio-frequency identification) technology for the contactless exchange of data by electromagnetic induction using loosely coupled coils over short distances of a few centimeters and a data transmission rate of maximum 424 kbit/s. NFC is also the technology that allows contactless card payments as well as mobile device payments. Google, Apple, and Alibaba use the NFC technology for their mobile payment services. Other technologies for mobile paymentrelated data transfers are Bluetooth, which is used by PayPal as well as Google Pay. Moreover, there are also optical data interfaces that work with QR (Quick Response) codes. The Chinese provider Mi Pay, for instance, offers merchants and customers to use a QR-based payment service. Online payment refers to various types of digital payments that are based on internet channels. There are different types of online transfers. The most common type is the electronic fund transfer. This type incorporates the standard online transfers that are usually based on the SWIFT inter-banking network. However, PayPal and other third-party payment account services also offer standardized money transfer approaches that can be considered electronic fund transfer. In contrast to electronic fund transfers, P2P currency transfers are usually platforms that enable economical foreign currency exchange. Conventional international electronic bank transfers come with high charges, intransparency, and long transfer times. Thanks to the so-called peer-to-peer concept, fees can be substantially reduced. An example is used here to illustrate this. A consumer wants to send US dollars from Germany to the United States, where USD is to arrive. The customer sends his money to a P2P currency transfer provider’s Euro account within the EU. This provider also has accounts in many other countries around the world. As soon as the Euros arrive, the money can be sent to the United States, where the provider also has a local account and can pay out the USD to the destination account quickly and cheaply. In this sense, the Euro does not leave borders, as would normally be the case with a traditional bank using SWIFT transfers. Such providers are, for example, TransferWise or CurrencyFair. Figure 5.21 illustrates the fundamental business model behind those services.

5.4 Digital Payment Systems and Applications

Bank Account User A

EURO

100 €

Bank Account User C

92 €

177

Bank Account User A

EURO

Bank Account User C

100 €

98 €

- x € Service Fee - x USD (Service fee) - x USD (Spread fee)

Banks and other intermediaries

- x USD (Service fee) - x USD (Spread fee)

P2P money transfer provider - x USD Service Fee

100 USD

Bank Account User B

110 USD Bank Account User D

108 USD

Bank Account User B

110 USD

USD

Bank Account User D

Fig. 5.21 Comparison international SWIFT transfer and P2P currency transfer

The last type of online transfers is based on other digital forms of currency or value stocks. Such alternative electronic money stands in contrast to conventional established value carriers and thus does not have a non-digital form such as the official currencies. According to the European Central Bank (ECB), electronic money is a financial instrument which represent value units stored on electronic data carriers in the form of a claim on the issuing body (European Central Bank 1998). It is issued in exchange for a sum of money and is accepted by third parties as means of payment without necessarily being legal tender. In this context, the transaction is not necessarily carried out via bank accounts, but the value units on the storage medium act as a prepaid bearer instrument. Electronic money is a means of payment by which any monetary value stored in electronic, including magnetic, forms as a claim on the issuer and which is issued against payment of a sum of money. This serves to execute payment transactions and is accepted by economic entities other than the issuer of electronic money. If the issuer is a central bank, it is digital central bank money and could also be legal tender, depending on its design. Digital central bank money is currently the subject of intensive research but has not yet been issued in any currency area. One approach of creating alternative currencies is the use of blockchain. As described in the previous section, blockchain offers a technological solution to securely store and transfer values. Bitcoin became the first digital currency to

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solve the problem of reproduction without a trusted authority or a central server. It relies on public registers (public ledgers) that record all transactions in the network.

Digital Payment Process Even though there is a wide variety of digital payment schemes, the value transfer between value holder and receiver is similar. Each step can involve various actors and parties and offers business opportunities in a relatively young and dynamic sectors. Figure 5.22 illustrates the payment value chain (content based on Deutsche Bank 2020, Deloitte 2019, Adyen 2018).

Payment receptor

Payment ordering body

Payment processing

Payment settlement

• Specification of requested amount for products or services

• Acceptance of payment request

• Procedural language transfer

• Selection of payment channel

• Interface transfer

• Transfer confirmation

• Payment request offering different digital payment channels

• Data processing

• Final settlement

• Usage of card, mobile device or online account

• Data transfer

•…

•…

• Authorization of access to account • …

• Transfer approval

•…

Direct transfer

Fig. 5.22 Digital payment value chain

The payment value chain can be separated into four steps. After a buyer or payment ordering body agrees to pay some amount to another actor, the respective payment receptor initiates the process. The payment receptor specifies the requested amount for purchased products or services, by offering different digital payment channels. In the second step, the payment ordering body accepts the payment request and selects one of the payment channels. In the following, a card, mobile device, or an online account is used. Subsequently a respective authorization of the access to the corresponding account is granted by the payment ordering body. The third step refers to the processing of the payment. It consists of procedural language transfer: the interface transfers the data processing and data transfer. The fourth and final step is the payment settlement. It is mostly concerned with the approval and confirmation processes which indicates the final settlement of the payment transaction. The digital payment transaction process can be described as a sender receiver scheme, which involves three different layers. The payment interaction layer, describing the readable information sent to both the payment-ordering and payment-receiving bodies; the interface layer, describing the respective user interfaces for both parties; and the transmission layer that processes the payment. This digital payment transaction process is described in Fig. 5.23.

5.4 Digital Payment Systems and Applications

179

Confirmation / Reporting

Payment Interaction Layer

Sender

• Confirmation of receipt • Technical reaction / response • Transmission information

Organisation or individual that aims at sending money to another actor

Organisation or individual that receives the money

Delivery System Interface Layer

Target Medium

Receiving device, which allows the input of the payment order (PC, service terminal, smartphone, tablet, smart watch, smart home devices)

Digital Payment

Encrypted Payment Data Transmission Layer

Recipient

Displaying device, which allows the receiving of the payment (PC, service terminal, smartphone, tablet, smart watch, smart home devices)

Decoded Payment Data

• Translation of information in transmittable data. • Encryption for secure transmission Transmission

• Decryption of received data Interpretation of transmitted information • Translation from transmittable code to readable information

• Method of transmission of data • Technical standards / Protocols • Physical transmission

Fig. 5.23 Digital payment transaction process

Digital Payment Success Factors Various aspects are relevant for the success of digital payment systems. These include in particular the costs compared to alternative systems, their technological acceptance, their use friendliness, their portability, and their speed and security. For the use of online payment methods, many providers require the user of the respective method to pay transaction-dependent fees. In addition, the transactionindependent costs incurred on the buyer’s side for the possibly necessary topping up of credit to the own online account or the procurement of required hardware or software must also be considered. On the seller’s side, the possible monthly basic fees to be paid by the buyer to the system provider have to be considered. In addition to the price and the security offered, an online payment system must be accepted by merchants and customers as a payment method. This increasing acceptance of online payment systems in general first of all leads to a reduction or even avoidance of aborted purchases by customers in the digital e-commerce sector, as they can complete the purchase process with a payment system of their choice. This purchasing behavior can be attributed to the increasing number of different

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payment methods offered, since every customer can choose his or her most preferred payment system. The acceptance of online payment methods in general has therefore increased in recent years due to more intuitive operation with increased userfriendliness. Whether a concrete online payment system will gain the acceptance of merchants and customers can be seen, among other things, in the high spread of this online payment system. An online payment system should be easy to use, and its operation should be comprehensible to the user. Online payment procedures that are highly complex have failed in the market in the past. Online payment systems that can be used on a variety of digital e-commerce platforms and thus have universal usability have another advantage over systems that are only used for one application. This requirement for online payment systems demands that the delay between outgoing payment at the customer and incoming payment at the merchant be kept as short as possible in order to ensure that a transaction can be processed at short notice. Both merchants and customers require online payment systems to comply with security standards for transaction transmission, intended to protect against unintentional manipulation during a transaction, which can manifest itself in the interception, alteration, or misuse of initiated transactions or be caused by faulty machine processing. In addition, there is the guarantee of a high level of payment security, which is particularly evident in real and permanent receipt of money by the merchant, as opposed to insecure payment by credit card, which carries a high risk of payment default. Thanks to the desired security in the transfer of money, a customer can count on correct delivery of goods and also has a simple means of processing complaints in the event of improper delivery or incorrect receipt of payment. However, this processing is subject to the respective guidelines of the payment service provider, which are not always transparent, and is therefore subject to a certain residual risk for both sides. Furthermore, there is also the user risk of potential insolvency of digital payment providers. They are only protected against insolvency by the deposit guarantee scheme in the case they are an official credit institution. All non-banks are not subject to this deposit insurance schemes. Therefore, users are at risk of losing their deposits. Figure 5.24 outlines the described success factors

5.5 Regulation of Digital Business

181

Costs compared to alternative systems

Security

Portability

Digital Payment Success Factors

Technological acceptance

Speed

User friendliness

Fig. 5.24 Digital payment systems success factors

5.5

Regulation of Digital Business

The initial phase of the Internet was characterized by its use in military and then also in science. This period was shaped by a form of self-regulation, in which the Internet was regulated mainly informally by scientists and IT experts without government intervention. The gradual liberalization of the Internet for the economic sector and the emergence of the Internet economy since the early 1990s created a wide range of applications and benefits for companies, states, and Internet users. At the same time, however, many potential economic, social, political, ethical, cultural, as well as legal risks and challenges emerged that require regulation or governance. The high complexity of the Internet economy, arising in particular from the growing interdependence of different areas and highly developed technologies, requires an increasingly sophisticated form of supervision and regulation. Against this background, the need for global regulation as well as the need of the participating actors to shape this regulation has increasingly gained center stage. Mark Zuckerberg, the founder and head of the social network Facebook, states in this context: “I believe we need a more active role for governments and regulators. By updating the rules for the Internet, we can preserve what’s best about it—the freedom for people to express themselves and for entrepreneurs to build new things—while also protecting society from broader harms” (Zuckerberg 2019).

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Formally Binding Content-Related Level of Internet Regulation Regarding the risks and regulatory challenges of the Internet economy, three main regulatory categories can be distinguished: competition law, criminal and civil law, and socio-legal regulatory aspects. These regulatory aspects can be summarized in a common conceptual reference framework, the so-called CSC Internet regulation model (see Fig. 5.25). Regulatory Aspects of Competition Law • Behavioral regulation of the abuse of market power (e.g. discrimination and obstruction strategies) • Monopoly position through merger strategies • Unreasonable harassment e.g. online advertising •…

Competition

Internet Society

Security

Regulatory Aspects of Societal Law

Regulatory Aspects of Criminal and Civil Law

• Freedom of speech

• Internet crime (cybersecurity)

• Digital disinformation/ manipulation

• Intellectual property rights (copyright rights, ancillary copyright)

• Media law aspects (press law regulation) • Corporate transparency and control of AI and other Internet activities •…

Fig. 5.25 CSC Internet regulation model. Source: Wirtz (2020b)

• Protection of privacy and personal rights (data protection) •…

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183

Regulatory Aspects of Competition Law Regulatory aspects of competition law include in particular the regulation of the abuse of market power, for example, by discrimination and obstruction strategies, monopoly positions through merger strategies, as well as unreasonable harassment, for example, through online advertising. This regulation is characterized by the highest degree of maturity and formalization as it is largely achieved through clear and advanced legislation. In this regard, legislators around the world have introduced laws against unfair competition and against restraints of competition. Central competition policy regulatory instruments in this context are the general ban on cartels, the ban on the abuse of market dominance, the ban on discrimination and obstruction, merger control, as well as provisions relating to unreasonable harassment. The latter are particularly relevant in connection with online advertising, spam, and matters of user consent for Internet offerings.

Regulatory Aspects of Societal Law In addition, socio-legal regulatory aspects of the Internet primarily concern freedom of speech, digital disinformation or manipulation, media law aspects such as press law regulation, as well as the societal transparency and control of AI and other Internet activities. Regulation is rather characterized by more abstract and unspecific regulatory instruments than by concrete legislation. In response to the growing problem of disinformation, the EU has presented various regulatory strategies and measures regarding the Internet. These include voluntary commitments for large online platforms and IT groups to contain digital dissemination of disinformation and create greater transparency for Internet users. Other regulatory measures refer to the promotion of general media competence, the support of journalistic and digital projects, and the development of own monitoring systems and information services (e.g., fact checks) in order to quickly counteract disinformation content on the Internet (Mündges 2019; European Commission 2018). Due to the early development stage of AI technology, the regulation of AI-based Internet activities has not been carried out through state legislation so far. Instead, AI is rather regulated in an abstract way, such as in the form of ethical guidelines at EU level or through the establishment of the Enquete Commission “Artificial Intelligence - Societal Responsibility and Economic, Social and Ecological Potentials” of the German Bundestag. In 2019, the US President has issued an “Executive Order on Maintaining American Leadership in Artificial Intelligence” (U.S. President 2019). Regarding this executive order, a “Guidance for Regulation of Artificial Intelligence Applications” was published by the responsible authorities (Vought 2019). In Europe, these efforts only constitute non-binding recommendations or soft law. In addition to the codification of ethical AI standards and regulations, scientific literature in the context of regulation also emphasizes the importance of AI limitations and boundaries, AI data requirements and analytical guidelines, as well as the improvement of digital and AI-related skills (Wirtz and Weyerer 2019a). After

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all, criminal and civil law aspects of AI regulation are restricted to cybercrime and the guarantee of cybersecurity, intellectual property (copyright rights), as well as the protection of privacy and personal rights (data protection).

Regulatory Aspects of Criminal and Civil Law Typical Internet crimes include identity theft/phishing, use of malicious software, malicious software for mobile devices, data theft and data abuse through social engineering, digital blackmailing, computer infection, and mass remote control of computers (botnets). In addition, the dissemination of terrorist, inciting, and child pornographic content, as well as the illegal trade in weapons and drugs particularly via dark net, is an essential component of Internet crime. The central criminal law instruments to prevent Internet crime are, for instance, laws on computer sabotage, computer fraud, data modification, and data spying. In addition, illegal and punishable Internet content, such as terrorist, race baiting, or child pornographic content, cannot only be regulated by criminal law but also through state censorship and corresponding filter systems (e.g., child sexual abuse anti-distribution filter of Europol). In addition, specific institutions or specific departments for the prosecution of Internet crime have emerged in recent years. For example, the European Cybercrime Centre has been created at Europol (European Commission 2013). In the United States, the FBI serves as the central authority for detecting online crimes (FBI 2020). Intellectual property rights with regard to the Internet fall under copyright and patent law. This affects aspects such as copyright protection, the transfer and exploitation of patent rights, or infringements. With regard to the naming, registration, and use and trade of Internet domains, the country-specific provisions defined by the law on the protection of trademarks are relevant. In this regard, the relevant copyright and patent legislation by the EU is also important. The European copyright legislation came into force in 2019, containing two regulatory changes that are particularly relevant for the Internet economy: the upload filter against infringements and the ancillary copyright for press publishers. In the United States, the Office of Intellectual Property Enforcement (IPE) is responsible for all kinds of property right issues (U.S. Department of State 2020). In addition to the protection of intellectual property, the protection of privacy and personal rights (data protection) is a central aspect of criminal and civil law regulation. In this connection, the right to informational self-determination is particularly relevant. At the European level, Art. 8 of the EU Charter of Fundamental Rights on the protection of personal data and the European General Data Protection Regulation (GDPR) applicable since 2018 are of central importance.

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Organizational, Decision-Making, and Competence-Related Regulation Level While the previous deliberations refer to the formally binding and content-related level of Internet regulation in the United States as well as Europe and present the existing central regulatory instruments, the following section addresses the organizational, decision-making, and competence-related dimension of Internet regulation. With regard to decision-making and the associated institutional responsibility, two main opposing approaches can be distinguished: the ITU approach and the Internet governance approach. Table 5.3 compares both approaches based on their central features. Table 5.3 Main approaches of Internet regulation ITU Approach • International approach • Transfer of regulation to the International Telecommunication Union (ITU) • Government regulation according to the principle of sovereignty • Government control of the national Internet • Low participation opportunities for non-governmental actors • Main criticism: limited effectiveness due to the diversity and power of private sector actors

Internet Governance Approach • Transnational approach • Transnational cooperation of governmental and non-governmental actors • Participatory understanding and multistakeholder principle (governments, companies, NGOs, citizens etc.) • The goal is a consensus-based regulation • Bottom-up regulatory approach • Main points of criticism: lack of legitimacy due to the involvement of non-governmental actors and power gaps between stakeholders

Source: Wirtz (2020b)

Given its intergovernmental character of regulation, the ITU approach can be seen as a purely international regulatory approach. This approach entails transferring Internet regulation to the International Telecommunication Union (ITU), a specialized agency of the United Nations responsible for telecommunications and information and communication technology issues. Thus, Internet regulation is subject to the sovereignty principle of states and follows the understanding of classical state regulation. The participation of non-state actors such as companies, NGOs, or citizens is hence largely excluded. Proponents of this regulatory approach include Russia, China, India, and Iran. The main point of criticism of the ITU approach is the limited effectiveness that can be expected from traditional state regulation. In contrast, the Internet governance approach is characterized by a transnational orientation, according to which the regulation of the Internet economy is the result of transnational cooperation between governmental and non-governmental actors. This approach is thus based on a participatory understanding and a multi-stakeholder orientation, which is supported by an open, equal, and constructive opinion-forming process and dialogue process of all social groups. These groups exchange

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information about technical standards, social and economic goals, political procedures, and other rules, values, and norms related to the Internet. The aim of the Internet governance approach is thus a consensus-oriented, bottom-up regulation of the Internet economy. Exemplary representatives of this approach include the United States, Germany, and the EU. The main criticism of the Internet governance approach relates in particular to the legitimacy deficit caused by the inclusion of non-state actors, as well as the sometimes very large power imbalance among the various stakeholders. This results in a disproportionate advantage of particularly powerful stakeholders. Out of the two regulatory approaches, the Internet governance concept has received particular attention in research and practice. A widespread and generally accepted definition of Internet governance comes from the Working Group on Internet Governance (WGIG) initiated by the United Nations. Accordingly, Internet governance can be understood as the development and application of common principles, standards, rules, decision-making procedures, and programs that govern the development and use of the Internet by governments, the private sector, and civil society (Working Group on Internet Governance 2005). In addition, Internet governance is seen as an essential element of a people-centered, inclusive, development-oriented, and non-discriminatory information society (International Telecommunication Union 2005). Overall, the formally binding and content-related level of Internet regulation, the regulatory aspects and instruments of competition, and social, criminal, and civil law are of particular importance. In addition, there are two essentially opposing regulatory approaches at the organizational level, the ITU and the Internet governance approach. Against the background of the progressive development of the Internet, a much more targeted, systematic, and comprehensive regulation of the digital activities of various players is required in the future. In this regard, a socio-legal and political framework, especially in an international context, must create a decided and differentiated body of regulations in order to enable an effective and efficient regulation of undesirable digital behavior.

5.6

Summary

• As the Internet is a rather loose network with constantly changing participants, each participant has to be identified in order to enable the accurate exchange of data. The domain name system (DNS) that allows the identification of the participants is a database that allocates each domain name to the respective IP address. • Companies use electronic data interchange (EDI) to integrate business processes and data. Within this standard, the data are usually transferred by means of XML or a special EDIFACT (electronic data interchange for administration, commerce, and transport) message.

5.6 Summary

187

• The development of the human-machine interface looks back on a long history. Meanwhile, the human-machine interface is characterized by a high degree of automatization and self-learning elements. The interaction between humans and machines occurs on the visual, acoustic, and sensory level. • The success factors of the human to machine (H2M) interface design and configuration are the ease of use of the H2M interface, the personalization/ individualization of the H2M interface configuration, the networking and integration capability of the interface solution, as well as the safety and reliability of the interface. • Risk factors of cybersecurity are the relevance of cyberattacks, potential hazards, the degree of hazard potential, security concerns, as well as the lack of risk awareness of the top management or the upper-level organizational unit. In contrast, resource factors to prevent these risks are security measures, emergency management, professional experience and expertise, as well as resource support by the top management or the upper-level organizational unit. • A transaction in the blockchain involves the initialization of the interaction, the representation of the transaction in a block, the distribution of the block to the network, the confirmation of the transaction, the attaching of the block to the blockchain, as well as the final execution of the transaction. • The digital payment value chain consists of the payment receptor, the payment ordering body, the payment processing, as well as the payment settlement. • Digital payment success factors are the costs compared to alternative systems, the security of transactions, the technological acceptance of the system, the user friendliness, the speed of transactions, as well as the profitability. • In terms of the formally binding content-related level of Internet regulation, the Internet can be regulated by competition law, criminal and civil law, as well as societal law. • With regard to the organizational, decision-making, and competence-related regulation level, the two main concepts of regulating the Internet are the ITU approach and the transnational Internet governance approach.

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Chapter 5 Questions and topics for discussion

Review questions 1. Present the client-server principle as well as the Internet addressing in an illustration and explain their interrelation. 2. Describe the HMI model of human-machine interaction. 3. Illustrate the risk-resources cybersecurity framework. 4. What is blockchain? Describe transaction phases and contents of blockchains. 5. Describe the CSC Internet Regulation Model.

Topics for classroom discussion and team debates

1. Discuss the future developments of human-machine interaction and configuration against the background of the increasing automation of human work through digital programs and interfaces. What are the risks for a democratic society and a free labor market? 2. Discuss the advantages and disadvantages of comprehensive cybersecurity measures to protect state infrastructure against the background of hacker attacks. Are these protection mechanisms also necessary for the consumer and business sector? In this context, discuss also the possibility of cyber wars between different states. 3. Debate the necessity of a stronger regulation of markets and competition against the background of the dominant market position of Internet companies such as Google, Amazon or Apple.

6

Internet of Things

Contents 6.1 Basics of Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of IoT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IoT IT Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Applications of the Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Factories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cities and Human . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail Environments and Worksites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outside and Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home and Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Internet of Robotic Things: IoT, Robotics, and Industrial Automation . . . . . . . . . . . . . . . . . Opportunities and Challenges of Industry 4.0 for Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stages of Industrial Automation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 IoT User Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Success Factors of IoT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IoT Key Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Learning Objectives By working through this chapter, you will be able to: 1. Explain the basic technological concepts of IoT and the IoT-specific IT infrastructure model. 2. Define application areas of IoT. 3. Explain the key opportunities and challenges of industry 4.0 from a business perspective. 4. Describe the five stages of digital industrial automation. 5. Explain the success factors of IoT.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_6

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6

Internet of Things

Within the last two decades, digital business has been particularly shaped by innovation in information technology. Invention and innovation are at the center of attention in digital business, more so than in any other area of the economy. Innovation in this context is understood as the successful market penetration of invention. The so-called Internet of Things (IoT) has been one of the most essential and innovation-based developments of digital business in recent years. IoT is often associated with various aspects and issues like big data, artificial intelligence, cloud computing, smart home, or industry 4.0.1 The foundation of IoT is the increasing information technology networking of products, services, machines, or sensors via an IP network: “IoT will increase the ubiquity of the Internet by integrating every object for interaction via embedded systems, which leads to a highly distributed network of devices communicating with human beings as well as other devices” (Xia et al. 2012, p. 1101). The following sections outline basics, applications, and success factors of IoT. Section 6.1 first presents the basics of IoT by providing a general understanding and definitions, as well as depicting an explanatory model of IoT. Section 6.2 deals with the applications of IoT, illustrating their relevance and market potential as well as giving practical examples. Section 6.3 takes a closer look at the combined use of IoT technology and robotics in an industrial context. Section 6.4 focuses on the users of IoT technology and their behaviors. Finally, Section 6.5 discusses success factors of IoT, indicating important starting points for businesses in the IoT market.

6.1

Basics of Internet of Things

The vision of IoT is often credited to Mark Weiser and his essay “The Computer for the 21st Century” (Weiser 1991). At the end of the 1990s, Kevin Ashton further developed the vision of Mark Weiser. Ashton had a determining influence on the development of the radio-frequency identification (RFID) approach at the Auto-ID Center at the Massachusetts Institute of Technology (now MIT Auto-ID Labs) and coined the term Internet of Things (Weiser 1991). RFID enables the Internet-based networking of products, services, machines, or sensors and is an information technology for sender-receiver systems to identify and localize them based on radio waves, thus playing a crucial role in the context of IoT. Especially in recent years, IoT has gained great importance. Its basic networking character with regard to products, services, machines, or sensors is associated with a very wide base of application for various application contexts and industries. Market forecasts expect a significant increase of IoT within the next years, assuming that the global market volume of IoT will decuple from 151 billion USD in 2018 to 1.567 trillion USD by 2025 (IoT Analytics 2018). In addition, experts assume that within the same period the number of connected devices worldwide will increase nearly threefold from 7 billion to more than 21.5 billion (IoT Analytics 2018). The focus of this growth development especially refers to the areas smart machine to machine

1

See for the following chapter also Wirtz (2020b).

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(M2M), smart electronics, and smart mobility (Statista 2017b). The three major IoT markets worldwide are China, the United States, and Japan (Statista 2017a).

Definition of IoT The market potential and the related possibility to introduce new applications and business models make IoT a huge market. A comparison of various publications on IoT reveals that there is no unified description of IoT so far. Table 6.1 presents selected relevant definitions. Table 6.1 Selected definitions of IoT Author(s) International Telecommunication Union (2012, p. 1) Miorandi et al. (2012, p. 1497)

Xia et al. (2012, p. 1101)

Gubbi et al. (2013, p. 1648)

McKinsey Global Institute (2015, p. 1)

Definition A global infrastructure for the information society, enabling advanced services by interconnecting (physical and virtual) things based on existing and evolving interoperable information and communication technologies. The term “Internet-of-Things” is used as an umbrella keyword for covering various aspects related to the extension of the Internet and the Web into the physical realm, by means of the widespread deployment of spatially distributed devices with embedded identification, sensing and/or actuation capabilities. IoT refers to the networked interconnection of everyday objects, which are often equipped with ubiquitous intelligence. Interconnection of sensing and actuating devices providing the ability to share information across platforms through a unified framework, developing a common operating picture for enabling innovative applications. This is achieved by seamless large scale sensing, data analytics and information representation using cutting edge ubiquitous sensing and cloud computing. We define the Internet of Things as sensors and actuators connected by networks to computing systems. These systems can monitor or manage the health and actions of connected objects and machines. Connected sensors can also monitor the natural world, people, and animals.

Source: Wirtz (2018b)

A closer look at the definitions shows that all of them address the characteristic of Internet-based networking of various factors within a network. Against this background, the following integrative definition is proposed and referred to throughout the book.

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Definition of Internet of Things (Wirtz 2018b) Internet of Things refers to the Internet-based networking of physical and digital products, services, machines, sensors, and humans.

IoT IT Infrastructure Smart IoT products and services require an innovative IT infrastructure that enables to meet the challenges and exploit the advantages associated with IoT (Porter and Heppelmann 2014). It becomes apparent that particularly basic information technology enables IoT. In this context, the concepts and technologies of big data, cloud computing, and artificial intelligence are particularly relevant, which will be explained in more detail in Chapter 7. In addition, the information technology infrastructure is important (see Fig. 6.2). Therefore, the following explains these concepts and corresponding technologies in detail. Figure 6.1 provides a general overview of the basic technological concepts of IoT.

Internet of Things (IoT)

IoT requires processing large volumes of data

Big Data

Data management via cloud services

Cloud Computing

Intelligent data analysis and IoT control

Artificial Intelligence

IoT IT Infrastructure

Fig. 6.1 Basic technological concepts of IoT. Source: Wirtz (2018b, 2020b)

The Internet of Things has a comprehensive application spectrum. The integration of big data, cloud computing, and artificial intelligence in the context of IoT significantly increases the complexity and available data. An efficient IT infrastructure is therefore essential for effective and efficient data exchange within the framework of IoT. Figure 6.2 illustrates how IoT technology generally works by means of the IoT IT infrastructure.

6.1 Basics of Internet of Things

Data Centers

Processed Data Flow / Device Steering

M2M Network/ Internet Infrastructure

• Gateways • Local Area Network (LAN) Routers • Edge Routers • Metropolitan Area Networks (MAN) Infrastructure • Wide Area Network (WAN) Infrastructure •…

RFID

Unprocessed Information / Data Flow

Endpoints/ Connected Objects

• Sensors • Actuators / Aggregators • Imagers • Low-Power Radio • Microcontrollers • Consumer Devices •…

193

• Data Storage • Data Computing / Processing Center • Unstructured / Structured Databases • Database Interfaces (APIs) • Back Office Servers •…

Fig. 6.2 IoT IT infrastructure. Source: Wirtz (2018b, 2020b)

At the detection level of the endpoints/connected objects, the necessary information and data is collected by means of sensors, RFID tags, actuators, or consumer devices. This information and data is then forwarded to the network level (M2M networks, Internet infrastructure). Due to the large number of sensors and transmitting devices as well as the associated very large and complex amount of data, a high-performance network infrastructure is necessary. In particular, the high number of mobile devices requires a highly developed mobile network in the 5G technology spectrum in the medium term. From the network level, the information and data is sent to servers in data centers. There, the very complex and large amount of data is processed by means of appropriate intelligent software such as AI software or big data analytics and redirected to the connected objects in the form of a “controlling” data flow. In summary, it can be stated that IoT is not only characterized by a broad and heterogeneous application spectrum but also by various basic technologies that are often used in conjunction with one another.

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In this connection, Fig. 6.3 depicts an exemplary IoT-specific IT architecture that contains the essential aspects of information technology with regard to IoT (content adapted from Porter and Heppelmann 2014; Wirtz et al. 2018b). Gateways External Data Sources Gateway connection to external data sources (e.g. weather, traffic, geo-mapping, social media etc.) that inform product/service capabilities Business System Integration Gateway connection to business systems and tools that integrate data from smart products/services into central business systems (e.g. ERP, CRM and PLM)

Rules/Big Data Analytics Engine Rules and big data analytical capabilities that feed the algorithms within the product/service operation with data, revealing new product/service insights

Connected Endpoints – Smart Products/Services

Internet Infrastructure & Connectivity

Product/Service Software Operating system, onboard software, user interface and product/service control instruments

M2M Network Communication Network infrastructure and protocols connecting the products/services with the cloud and data centers, enabling communication

Development & Implementation Platform Platform for application development and implementation enabling fast realization of smart applications by means of sophisticated computing tools

Product/Service Hardware Onboard sensors, processors, and connectors in combination with conventional technical components

Product/Service Database Big-data database system for storage, aggregation, processing and management of (real-time) product/service data

Processed Data Flow / Device Steering Unprocessed Information / Data Flow

Cybersecurity and Identity Management Security tools for protecting product/service cloud and data centers, Internet infrastructure and product/service connectivity, as well as controlling user authentication and system access

Fig. 6.3 Exemplary IoT-specific IT architecture. Source: Wirtz (2020b)

Standardization

Standardization

Product/Service Cloud & Data Centers Smart Product/Service Applications Software applications on remote servers manage monitoring, control, optimization and autonomous operation of product/service functions

6.1 Basics of Internet of Things

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The IoT-specific information technology system is composed of different layers. The first layer represents the product/service cloud and data centers and can be thought of as the analytical control center of the system. This includes smart product/ service applications running on remote servers to monitor, optimize, and operate product/service functions, as well as a rules and a big data analytics engine containing the business logics and big data analytical capabilities (algorithms and codes) to reveal new insights. In addition, the product/service cloud incorporates a development and implementation platform for building software as well as a product/service database for the aggregation and management of real-time and historical big data with regard to the product or service. The second layer of the information technology infrastructure refers to Internet infrastructure and connectivity and thus the network communications between the product/service and product/service cloud. Finally, the third layer relates to the connected endpoints, i.e., the smart products/ services containing the product/service software, particularly the operating system and other onboard software, as well as the product/service hardware, most importantly sensors, processors, and connectivity ports. These layers are surrounded by a cybersecurity and identity management structure providing a set of security tools to control user authentication and system access, as well as to protect each layer against attacks and unauthorized access. Moreover, a gateway links external data sources to the connected endpoints or smart products/ services and product/service cloud, enabling the retrieval and integration of external data (e.g., weather and traffic data, geo-mapping, or social media data). Finally, there is also a gateway to business systems by means of tools, connecting enterprise systems (e.g., ERP and CRM) to the connected endpoints or smart product/service and product/service cloud as well as integrating respective smart data from both systems. An important challenge in the context of IoT refers to the compatibility of the different information technology tools and components, requiring respective standardization. The following section illustrates the interaction and the areas of application of the different enabling technologies by means of an IoT example from the area of traffic (see Fig. 6.4, content based on McKinsey 2017a).

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GPS

Internet of Things

The learning of autonomous vehicles is based on data exchange with other vehicles

In autonomous vehicles, drivers hand control to the vehicle and become co-drivers

Internet Connectivity

RFID

The AI engine calculates the car´s trajectory based on 3DLIDAR images of the car´s surroundings

A cloud-based AI engine processes large amounts of data and shares updates and learnings with vehicles

Supporting Technologies

Big Data – Computing Capacity

AI – Technology, Processing & Analytics

Cloud – Upload & Services

Information Technology Infrastructure

Data Computing/Processing Centers

Device Steering

M2M Network/Internet Infrastructure

RFID Data Flow

Endpoints/Connected Objects

Fig. 6.4 Illustrative example of IoT with application areas of enabling technologies. Source: Wirtz (2018b, 2020b)

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The example of autonomous driving in the automotive context is particularly well suited as it involves all IoT enabling technologies and is of importance to society as a whole. The basic idea of autonomous driving is that the controls are left to the vehicle itself and drivers become riders. In principle, autonomous vehicles are supposed to learn by exchanging information with other vehicles and in the long run share what they have learned through interaction or via a centralized platform. In this context, AI-based techniques such as machine learning approaches (e.g., neural networks) are particularly important and already used in advanced driver assistance systems. Although the introduction of highly automated vehicles into the road traffic is expected in 2025, there are already the first hybrid systems that integrate selflearning elements (such as Tesla) and numerous other automobile manufacturers seeking to expand the use of AI. The goal is to develop fully integrated, learningbased systems that are optimized by AI algorithms. An AI engine calculates the route based on 3D images that are created by means of so-called LIDAR systems, i.e., laser scanners for optical distance and speed measurement. The formation of such AI systems requires large amounts of sensor data, as well as considerable computing power and capacity. A cloud-based AI engine serves to process large amounts of data as well as to pass on updates and learned information to vehicles. In addition to basic technologies such as GPS, RFID, and Internet connectivity, as well as the above-mentioned AI technologies, the technological infrastructure needs to have both respective big data resources and a respective cloud platform. After having presented the basics of IoT, the next section addresses application areas of IoT technology.

6.2

Applications of the Internet of Things

Based on a superior IoT infrastructure, there are various applications of IoT. The field of application is particularly wide due to the universal character of application in terms of the Internet-based networking, information, and management. The scope of application ranges from smart home, smart factory, and smart health to smart mobility or smart cities. In this connection, the McKinsey Global Institute (2015) has identified nine basic application areas of IoT in their study. Figure 6.5 illustrates these applications sorted according to their revenue and market potential in descending order (content adapted from McKinsey Global Institute 2015).

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Setting Factories

Cities

Human

Retail

Worksites

Outside

Vehicles

Home

Offices

Low Potential

Internet of Things

Description

Examples

Size in 2025*

Standardized production areas

Locations with repetitive workflows, such as farms and hospitals; operational efficiencies, asset utilization optimization and inventory

1,210 3,700

●

Urban areas

Public spaces and infrastructure in urban environments; resource management, environmental monitoring, smart meters, adaptive traffic control system

930 1,660

◕

Portable devices attached to or inside the human body

Devices (wearables and ingestibles) for monitoring and preserving human health and well-being; improved fitness, disease management, increased productivity

170 1,590

◕

Places where consumers engage in commerce

Shops, malls, restaurants, banks, self-service checkout

410 1,160

Custom production areas

Construction, mining, oil and gas; operating efficiency, safety and health, predictive maintenance

Outside of urban and other areas

Autonomous vehicles outside of urban environments, railroad tracks, shipment tracking, flight navigation; real-time routing

560 850

Inside of vehicles

Cars, trucks, trains, ships, airplanes, helicopters, conditionbased maintenance, usage-based design,

210 740

Inhabited buildings

Security and home automation control systems

Places where knowledge workers operate

Security and energy management in office buildings; increased productivity

◑ ◑ ◑ ◑ ◔ ◔

160 930

200 350 70 150

High Potential

*Potential economic impact of IoT in 2025 [in billion USD]

Fig. 6.5 Application areas of IoT. Data source: McKinsey Global Institute (2015)

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Against this background, it becomes apparent that the use of IoT applications shows the highest value potential in the areas smart factories (factories), smart cities (cities), and smart human devices (human). The following addresses each field of application individually, describing them by means of examples and highlighting their expected economic impact (see for the following McKinsey Global Institute (2015)).

Factories The first setting identified for IoT use refers to factories including all standardized production environments, i.e., manufacturing, agriculture, and hospitals (McKinsey Global Institute 2015). The application of IoT to the manufacturing industry is often subsumed under the term industrial Internet of things (IIoT) or smart factory. IIoT denotes the next phase of digital factory automation, representing the full digitization of the industrial sector and its production processes. This subject has gained special importance in recent years, especially due to the significant competitive advantages it can provide to companies. A good example in this context is Siemens as one of the largest industrial manufacturing companies worldwide. Siemens has developed MindSphere, a cloud-based open IoT operating system. MindSphere permits to connect systems, facilities, machines, devices, and products and thus makes them the basis of a digitally networked industry. The IoT operating system is applied in various fields, especially regarding the predictive maintenance of industrial plants (Siemens 2020). In the context of the maintenance of these systems or machines, their components need to be checked for wear or substituted after a certain period. Such an IIoT-based maintenance platform incorporates rules for automated decisions to analyze a machine’s condition at any point in time and to detect wear patterns by means of sensors attached to the components to preemptively initiate a maintenance and repair process. Thus, if a certain component is about to reach the wear limit or breaks down, the sensor reports it and triggers an automatic order of the spare part or repair service. It is also conceivable that a machine could replace or repair certain components by itself, for instance, by means of self-repairing materials. According to the McKinsey Global Institute, the revenue and market potential of IoT applications in the context of factories is very high and expected to create value of 1.2 trillion to 3.7 trillion USD per year in 2025 (McKinsey Global Institute 2015).

Cities and Human The use of IoT in the context of cities or urban environments generally refers to the well-established concept of smart city that describes the application of modern information and communication technology and IoT to urban infrastructures and services (McKinsey Global Institute 2015). Smart cities have received special attention in recent years, particularly in light of the general urbanization trend worldwide and due to their ability to improve the population’s quality of living. The European Union, for instance, has already launched its initiative “European

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Innovation Partnership on Smart Cities and Communities” in the year 2012 to promote the development and use of smart technologies in urban environments (European Union 2012). Unsurprisingly, European cities like Amsterdam and Barcelona are among the early adopters of smart city technology. The city of Amsterdam, for instance, started digitalization in the context of waste disposal, attaching sensors to more than 2000 waste bins, which inform the waste disposal companies via the cellular network when they need to be emptied (T-Systems 2017). In the meantime, smart city initiatives have quickly emerged within countries all over the world (e.g., Denmark, Dubai, France, Germany, Singapore, the United Kingdom and the United States), implementing IoT-based technology into their urban infrastructures. One of the most helpful and widely applied smart city solutions pertains to traffic and parking. In this connection, many cities (e.g., Amsterdam, Barcelona, and San Francisco) have implemented smart parking solutions. More specifically, for instance, some cities have begun to integrate sensors into their streets or parking garages that inform citizens in search of a parking lot via smartphone app or traffic guiding systems about the closest parking spot available (TechRepublic 2015). In terms of revenue and market potential, the McKinsey Global Institute sees a high economic impact of IoT applications in the context of cities, estimating a value of 930 billion to 1.7 trillion USD per year in 2025 (McKinsey Global Institute 2015). The use of IoT in the context of the human body refers to devices attached to or implanted into the human body. This category generally includes two types of IoT applications: devices improving health or fitness and devices increasing human productivity, particularly in the workplace (McKinsey Global Institute 2015). A good example of an IoT application in the human setting is the commonly used smartwatch. Smartwatches belong to the category of so-called wearables and are wristwatches with extensive functionalities in terms of wearable computers. Besides offering common smartphone functionalities, like displaying phone calls and sending notifications, smartwatches also often support wireless network technologies such as Bluetooth, WLAN, and GPS. In addition, they can usually connect to other devices like smartphones or tablets and collect data from internal or external sensors that, for instance, gather biometric data such as heart rate or physical activity and movement. According to the McKinsey Global Institute, IoT applications in the context of the human body also show a high revenue and market potential with an expected value of 170 billion to 1.6 trillion USD per year in 2025 (McKinsey Global Institute 2015).

Retail Environments and Worksites The application of IoT in retail settings refers to the deployment of IoT technology in any physical environment in which consumers engage in commerce, utilizing a product or service (McKinsey Global Institute 2015). A good example of a company applying IoT in their sales context is the retail company McDonald’s, one of the largest fast-food restaurant chains worldwide. In collaboration with the beacon solution provider Piper and with the aid of their beacon technology, McDonalds

6.2 Applications of the Internet of Things

201

launched a mobile app that allows them to send personalized greeting messages as well as to deliver coupons, surveys, and employment opportunities to customers on their smartphones who are geographically close to a McDonald’s restaurant (Piper 2016). Furthermore, McDonald’s has started to introduce digital self-ordering stations in their restaurants. After placing an order via touchscreen, customers receive a digital location device and may take a seat. Once their order is ready, the technology guides the service staff to the table of the respective customer to deliver their order (New York Times 2016). According to the McKinsey Global Institute, the revenue and market potential of IoT applications in the context of retail environments is medium and expected to create value of 410 billion to 1.2 trillion USD per year in 2025 (McKinsey Global Institute 2015). The use of IoT in the context of worksite industries particularly refers to custom production environments comprising the areas of construction and mining as well as oil and gas. Worksites have been among the earliest fields of application of IoT (McKinsey Global Institute 2015). One of the largest companies in the world has meanwhile become engaged in smart field technology and thus serves as a good example in this connection. The multinational oil and gas company Royal Dutch Shell, for instance, has attached thousands of sensors to its oil fields and respective equipment (e.g., pumps and valves). These sensors collect data with regard to temperature, pressure, and other aspects and report it to Shell’s engineers in their control centers who can this way monitor the production process and take actions, if necessary (RCR Wireless News 2016). Moreover, Shell particularly uses sensor technology in conjunction with robotics and developed autonomous underwater vehicles in cooperation with specialized partner companies for the inspection of subsea infield and pipelines to capture seismic data, for instance (Shell 2015). In terms of revenue and market potential, the McKinsey Global Institute sees a medium economic impact of IoT applications in the context of worksites, estimating a value of 160 billion to 930 billion USD per year in 2025 (McKinsey Global Institute 2015).

Outside and Vehicles The outside setting refers to the use of IoT technology in areas outside all of the other fields of application mentioned, in particular, outdoors in non-urban environments. More specific applications in this setting are, for instance, package delivery, container shipping, as well as the railway, logistics, and transportation infrastructure (McKinsey Global Institute 2015). Transportation and logistics companies are among the early adopters of IoT. In the maritime industry, for instance, ships have been already equipped with sensor technology such as onboard sensors for decades, capturing large volumes of data that meanwhile can be analyzed by means of IoT technology to enhance operations. The relevant actors within the maritime traffic, such as captains, ship personnel, and onshore maritime traffic coordination centers, can use a mobile app called REX (route exchange) that reads the onboard sensors of ships and provides

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them with respective real-time information (BlackDuck Blog 2017). In relation to the economic impact of IoT applications in the outside setting, the McKinsey Global Institute estimates suggest a medium revenue and market potential with an expected value of 560 billion to 850 billion USD per year in 2025 (McKinsey Global Institute 2015). The application of IoT technology to vehicles including cars, trucks, trains, and aircraft mainly refers to their digital automation and condition-based maintenance. A popular and often cited example in this connection is the so-called connected car whose design and development gained center stage within the automotive industry worldwide. The German automobile manufacturer BMW, for instance, has started to connect its cars to IoT. BMW’s so-called ConnectedDrive technology represents an application suite intended to bring connectivity to the car. ConnectedDrive enables customers to access digital services such as real-time traffic information, concierge service, Microsoft Exchange, intelligent emergency call, online logbook, and so on. In addition, customers can use remote services by means of BMW’s Connected app, through which they can lock or unlock their vehicle, find its location, or check vehicle information such as gas level and range (BMW AG 2017). BMW is continuously working on improving and extending vehicle connectivity and plans to connect the car with devices in the home setting, such as the owner’s house and heating system (BMW Blog 2016). Overall, the McKinsey Global Institute predicts a medium economic impact of IoT applications in the context of vehicles in terms of revenue and market potential, estimating a value of 210 billion to 740 billion USD per year in 2025 (McKinsey Global Institute 2015).

Home and Offices Another essential application area of IoT is the home environment. The use of IoT technology in the home setting refers to the field of home automation and the wellestablished concept of smart home. This concept generally describes the intelligent networking, automation, and control of building technology (e.g., heating, lighting, air conditioning, and security), home appliances (e.g., washers, dryers, refrigerators, freezers, and ovens), and consumer electronics (e.g., flat-screen TVs, DVD and media players) by means of information technology, which is possible in many forms. For example, Amazon, the largest Internet-based retail company in the world, has launched a smart speaker for the home environment called Amazon Echo. This device is able to receive acoustic commands via seven integrated microphones and connects to the voice-controlled intelligent personal assistant Amazon Alexa. The user can interact with Alexa via voice and initiate different actions, such as music playback, reporting all kinds of real-time information (e.g., news, sport results, weather and traffic information) and ordering products on Amazon. Amazon Echo is also capable of controlling several smart home devices such as thermostats, lamps, or light switches, thus serving as a home automation hub (Amazon 2017).

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However, according to the McKinsey Global Institute, the overall revenue and market potential of IoT applications in the context of smart home is comparatively low and expected to create value of 200 billion to 350 billion USD per year in 2025 (McKinsey Global Institute 2015). The last application area of IoT refers to the office setting which is here defined as physical commercial environment in which primarily knowledge work is carried out (McKinsey Global Institute 2015). The applications in the office setting are quite similar to those mentioned above with regard to the home environment. Smart devices like Amazon Echo are complemented by office functions, making it more useful to businesses and thus are increasingly used in the office environment. Amazon Echo, for instance, meanwhile supports Office 365 calendars, and companies like Oracle and Box are already using Amazon Echo with Alexa voice control with regard to conference room check-in (TechRepublic 2017). Another example of a smart device in the office setting is the Ava 500 robot, an autonomous business telepresence robot from the company iRobot. This robot allows employees to be remotely present when they are out of office and connects them from their virtual or mobile office to the respective company site and interaction partners. Employees can control it remotely by means of an iPad or iPhone, but it can also move autonomously to selected destinations (e.g., conference rooms and offices) by means of its sensors without requiring human guidance (iRobot 2014). Overall, the McKinsey Global Institute predicts a comparatively low economic impact of IoT applications in the office setting in terms of revenue and market potential, estimating a value of 70 billion to 150 billion USD per year in 2025 (McKinsey Global Institute 2015). According to the McKinsey Global Institute 2013, p. 52, the business logic of IoT applications comprises three steps: • “capturing data from the object (for example, simple location data or more complex information), • aggregating that information across a data network, • and acting on that information—taking immediate action or collecting data over time to design process improvements.” The first step pertains to the initial collection of data and the measuring technology by means of which it is captured. The latter particularly refers to sensor technology, which includes simple identification tags, such as RFID tags, as well as more sophisticated sensors and actuators, such as micro-electromechanical systems (MEMS) that go beyond the scope of location tracking and communicate more complex data (e.g., performance, condition, etc.). The second step describes the processing, aggregation, and storage of data, as well as their integration with a company’s core business systems. This particularly requires a rules and analytics engine as well as big data database system. The third step refers to the utilization of the information gained by means of IoT-technology and deriving benefit therefrom. The creation of value can take many forms, such as improved efficiency and operational improvements, strongly depending on the field of application.

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Internet of Robotic Things: IoT, Robotics, and Industrial Automation

In recent years, the Internet of robotic things has gained significant importance in the field of IoT. In the context of IoT application in the industrial sector or in production, the terms industrial Internet of things (IIoT) and industry 4.0 are used frequently. They are essentially characterized by intelligent networking, automation, collaborative control, and real-time monitoring. IoT offers various advantages to industrial companies, for instance, through the development of more efficient technological solutions for problems in production, improved workflows and operating procedures, and a rise in productivity. Especially in the automation industry and the related areas of industrial control, measuring technology and process automation, IoT is important and represents a significant success factor.

Opportunities and Challenges of Industry 4.0 for Business Meanwhile, many companies in the industrial sector have implemented companyinternal, proprietary IoT networks for the automation in production. In doing so, IIoT or industry 4.0 provides a wide range of challenges and opportunities for companies. The greatest opportunities of industry 4.0 from a business perspective are improved planning and controlling in production and logistics, higher customer satisfaction, increased flexibility in production, faster time to market, improved quality, and the possibility of individualization of products (PricewaterhouseCoopers 2014a). The greatest challenges of industry 4.0 from a business perspective are the uncertain economic benefits and excessive investments, insufficient qualifications of employees, and the lack of regulations, standards, and forms of certification. Moreover, there are challenges due to the uncertain legal situation regarding the use of external data, the low maturity level of required technologies, and unresolved questions concerning data security (PricewaterhouseCoopers 2014a). Table 6.2 shows the most important opportunities and challenges of industry 4.0 from a business perspective (content based on PricewaterhouseCoopers 2014a). In IIoT or industry 4.0, the field of robotics is gaining significant importance with regard to automation of production. The Internet of robotic things (IoRT) is a new concept that combines IoT technologies with robotic and autonomous systems, thus improving the capabilities of current IoT and robotic systems and enabling the creation of new, revolutionary applications and services in the context of industrial automation (Simoens et al. 2018).

6.3 Internet of Robotic Things: IoT, Robotics, and Industrial Automation

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Table 6.2 Key opportunities and challenges of industry 4.0 from a business perspective IoT Opportunities • Improved planning and controlling

• Higher customer satisfaction • Increased flexibility in production

• Faster time to market • Improved quality • Individualization of products •…

IoT Challenges • Uncertain economic benefits and exceeding investments • Insufficient qualifications of employees • Lack of regulations, standards and forms of certification • Uncertain legal situation regarding the use of external data • Low maturity level of required technologies • Unresolved questions concerning data security •…

Source: Wirtz (2020b)

Stages of Industrial Automation With regard to industrial automation, various stages of development can be distinguished, whereby the level of automation generally increases in line with technological progress. Previously documented levels of automated driving can serve as a point of reference and be transferred to a more general machine application context (SAE 2018; NHTSA 2017; United Nations 2018). Against this background, Fig. 6.6 shows the development stages of industrial automation that is increasing according to progress in IoT technologies and robotics. Starting point (Stage 0) is the non-automated state, where controlling and monitoring of the system is the responsibility of the person in charge (human operator) and no intervening IoT/AI system is active. Building upon this, five further stages of development can be distinguished: assistance (Stage 1), partial automation (Stage 2), conditional automation (Stage 3), high automation (Stage 4), and full automation (Stage 5). In Stage 1, an IoT/AI system assists the human operator in controlling a machine or system. The human operator is responsible for controlling the main functions of the machine, while the IoT/AI system controls additional features. Stage 2 is characterized by a semi-automated level of automation. Here, the IoT/AI system controls the main functions of the machine, while the human operator acts as a supervisor and controls additional machine features. In Stage 3, industrial machines are conditionally automated. This involves the IoT/AI system controlling the main functions of the machine, while the human operator controls additional features and needs to be ready to take control of the system at any time when the IoT/AI system gives notice.

Fig. 6.6 Stages of industrial automation. Source: Wirtz (2020b)

• IoT system performs additional tasks

• Human operator is in control of the main functions of the machine

Stage 1: Assistance • Human operator acts as supervisor and controls additional features

• IoT system performs the main control functions

Stage 2: Partial automation • Human operator performs additional tasks and must be ready to take control of the system at any time with notice

• IoT system performs the main control and monitoring functions

Stage 3: Conditional automation • Human control is optional

• IoT system is capable of performing all system features under certain conditions

Stage 4: High automation

Technological Progress

• No human control is necessary

• IoT system is capable of performing all system features under all conditions

Stage 5: Full automation

6

• No intervening IoT system

• Control and monitoring of the machine is entirely the responsibility of the person in charge (human operator)

Stage 0: No automation

Degree of Automation

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207

Stage 4 implies a high degree of automation. This means the IoT/AI system is capable of controlling all machine functions under certain conditions, while the human operator has the option to take control. Stage 5 is the last stage of automation development and describes the state of full automation, according to which the IoT/AI system is capable of controlling all machine features under all conditions and human control is unnecessary. The increasing implementation and application of advanced IoT technology and robotic solutions in order to automate production in many companies will generate an immense volume of data. The way this data is processed and analyzed will play a decisive role in the development progress and quality of automation. However, current communication technologies, such as 3G and 4G mobile networks, cannot meet the requirements of IIoT or IoRT, particularly in terms of low latency, high data rate, coverage, and reliability, thus hindering automation development. Against this background, especially 5G network is expected to have a high value creation potential to further advance the development of IIoT and industrial automation (Cheng et al. 2018). In summary, it can be stated that within the broad spectrum of application fields of IoT, most notably the industrial sector is of particular importance, characterized by a variety of opportunities and challenges. Especially the combination of IoT technology and robotics is advancing progress in automation in the industrial sector, leading to more efficient problem solutions, workflows, and operational processes, as well as increased levels of productivity. Against the background of its various fields of application and modes of action, it becomes apparent that particularly basic information technology enables IoT. Above all, IoT requires the processing of large amounts of data. The large amounts of data and information available in the context of IoT are increasingly transferred and processed via cloud computing technologies, i.e., data management is essentially carried out via cloud services. In the context of IoT, cloud services are increasingly used in combination with artificial intelligence services. In this matter, artificial intelligence will play a particularly important role in the future, especially for intelligent data analysis and IoT control. Thus, the concepts and technologies of big data, cloud computing, and artificial intelligence are particularly relevant. As these are common technologies of digital business, these aspects are discussed more detailed in Chapter 7. After having discussed the technological infrastructure of IoT and fields of application, the next section focuses on user behavior concerning the Internet of things.

6.4

IoT User Behavior

The use of IoT has increased considerably in recent years and is about to increase even more in the years to come. Regarding the use of IoT, two essential groups of users can be distinguished: industry and consumers. In the following, central aspects of IoT user behavior of these two user groups will be described.

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Industry First and foremost, especially in the industrial context IoT is considered to be of special importance. In a survey among 3000 decision-makers from six countries, Microsoft has examined adoption as well as the most important benefits of IoT for businesses. A majority of 85% of the interviewed decision-makers are using IoT technology and another 5% have used IoT in the past. Industry use cases of IoT range from the areas of retail/wholesale (90% IoT use) or transportation (86% IoT use) to government (83% IoT use) and healthcare (82% IoT use). Manufacturing (87% IoT use) is of course another major area of IoT application in an industrial context. In organizations that have adopted IoT, experienced benefits include increased efficiency (91%), increased yield (91%), and improved quality (85%) (Microsoft 2019). These benefits are presented in more detail in the following figures. Figure 6.7 illustrates the IoT benefit increased efficiency. Percentage

60%

55%

50%

42% 40%

35%

33%

30%

26%

20%

10%

0% Overall efficiency

Team productivity

Time efficiency

Decisions efficiency

Business model innovation efficiency

Fig. 6.7 IoT benefit increased efficiency. Data source: Microsoft (2019)

The most often mentioned benefit of IoT implementation in organizations is increased overall efficiency, which is appreciated as an IoT top benefit by 55% of decision-makers. In the cluster of increased efficiency, it is followed by the aspects improved team productivity and time efficiency. IoT also facilitates the efficiency of decisions and can lead to more efficiency in business model innovation, thus contributing to various efficiency aspects in a company. Increased yield is also perceived as one of the top benefits of IoT. The use of IoT can increase production capacity, provide cost savings, and increase the revenues of a company. It also enables companies to offer customers new products or services and to develop new revenue streams (see Fig. 6.8).

6.4 IoT User Behavior

209

Percentage 50% 43%

45%

39%

40%

36%

35%

35% 30%

27%

26%

25% 20% 15% 10% 5% 0% Increases production capacity

Provides cost savings

Increases revenue Reduces business Enables new types Enables new expenses of customer revenue streams offerings

Fig. 6.8 IoT benefit increased yield. Data Source: Microsoft (2019)

Furthermore, 85% of decision-makers perceive IoT technology to improve quality, as it reduces the chance for human error in organizations and increases customer satisfaction and a company’s competitive advantage (Microsoft 2019) (see Fig. 6.9). Besides industry, consumers are another essential user group of IoT. The IoT usage behavior of industry and consumers differs greatly. The spectrum of IoT use is Percentage

50%

45%

45%

44% 41%

40%

35% 30% 25% 20% 15% 10% 5%

0% Reduces chance for human error

Increases customer satisfaction

Fig. 6.9 IoT benefit improved quality. Data source: Microsoft (2019)

Increases company's competitive advantage

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much smaller and more homogeneous on the consumer side than in industry or business. In addition, the share of IoT use is also much smaller among consumers than in industry.

Consumers Two important main areas of consumer IoT use are smart homes and smart cities. The term smart home refers to the use of IoT technology at home to monitor, control, and regulate electronic devices in the household such as refrigerator, air conditioning, and lighting, as well as other household appliances such as heating, electricity, door lock, or a security camera (Kim et al. 2017). A relatively high proportion of smart home households is found particularly in the United States (33%), but also in Great Britain (25%). Germany and Japan have similar shares of 20% and 19%, respectively. China, by contrast, is far behind the other leading industrial nations with a share of 8% (Statista 2019a). In this context, Table 6.3 shows the distribution of smart home users by age in the United States. Table 6.3 Smart home users by age Overall (%) Smart Appliance (%) Smart Thermostat (%) Smart Lights (%) Other (%)

Average 24 16 14 13 7

18–25 33 18 14 25 6

26–35 46 33 22 25 14

36–45 29 18 16 15 8

46–60 14 6 9 6 3

61+ 15 6 9 6 3

Data source: Walker Sands (2017)

First of all, it can be seen that smart home solutions are especially accepted in the younger to middle-age segments. The 26–35-year-olds are the top group with a usage share of 46%, followed by the 18–25-year-olds with a usage share of 33%, and the 36–45-year-olds with a share of 29%. Among the older age groups, however, smart home use is not as pronounced, with 14% usage share among 46–60-year-olds and a slightly higher share of 15% among people who are 61 years and older (Walker Sands 2017). Perceived benefits of smart home solutions for consumers are an improved quality of life, safety provision, and the perception that smart home solutions make things more effortless and provide comfort. However, the main drawbacks for most consumers are the increased dependence on technology and the monitoring of private activities (Singh et al. 2018). The IoT solutions for consumers presented so far are IoT applications for private use. Another area of application of IoT that is extremely important for consumers is smart city, which essentially refers to IoT applications for public use in cities and urban areas. Against this background, a user survey in Germany shows that 34% of citizens are interested in smart city solutions (Wyman 2020). Figure 6.10 presents their interest with regard to different solution clusters.

Cluster communities/sharing

6.4 IoT User Behavior

211

12%

P2P bicycle sharing

16%

Virtual family

16%

28%

30%

17%

Smart contract sharing 7%

Collaborative living Cluster living

21%

Local social job market

33%

19% 12%

Platform with rental price data

31% 24%

Local, decentralized, renewable energy concepts 12%

Cluster safety

Crisis Management

29%

16%

Disaster warning system

31% 23%

Incentives for climate-neutral behavior

Cluster mobility

36%

27%

Smart street lighting

36%

25% 19%

Automated driving

37% Frequency of use

29%

Smart bus stops

25%

Automated ticket

25%

Interest 33% 36%

24%

Comprehensive mobility solution

36% 29%

Traffic management systems

37%

26%

Smart parking solutions 10%

Video identification Cluster administration

32%

26%

Smart use of water

Info app for the city

Cluster healthcare

36%

17%

Public renewable electricity sources

Cluster sustainable city

32% 22%

Public safety

Digital ID card and e-voting

16%

Digital administration

16%

Smart health offers

19%

Smart healthcare system

19%

20%

31% 40% 43% 31% 41% 30%

16%

Smart logistics solutions

42%

29% 18%

Digital education

Information systems in the city Cluster infrastructure

38%

32% 26%

Waste disposal

36% 48% 50%

Broadband infrastructure

0%

10%

20%

30%

40%

50%

60%

Fig. 6.10 Interest in smart city solutions and frequency of use. Data source: Wyman (2020)

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Citizens show most interest in the clusters infrastructure (37%), healthcare (36%), administration (36%), and mobility (35%). Particularly young people under the age of 38 demonstrated interest in smart city solutions. Overall, the spectrum of potential IoT applications is smaller than for industrial use. However, there is an increase in use in this area as well. In addition to the private use context, the public use context with smart city solutions is also relevant for consumers in urban areas. It is apparent that smart solutions are of particular interest to younger consumers. For the acceptance and use of IoT solutions by both consumers and the industry, certain success factors are important, which are described in the following section.

6.5

Success Factors of IoT

The Internet of Things has been one of the most important and most promising innovations in the field of digital business in recent years. In particular, its broad and comprehensive application spectrum is crucial for further development. In connection with IoT, there are four key success factors shown in Fig. 6.11.

Digital Business Model Innovation/ Diversification Competence

System Technology Competence

• Business model development in the innovative IoT environment

• Combinability of software & hardware IoT solutions

• Creation of business model innovations for IoT

• IoT service/platform customization

• Diversification ability of existing IoT solutions in other industries/ applications

Integration Ability of Complex IoT Services

• Management of IT platform & infrastructure • Data security Digital Intelligence Competence

• Horizontal & vertical integration ability of application levels

• Development of intelligent IoT service solutions

• Integrated service offers

• Development of IoT-artificial intelligence/ big data software & analytics

• Complexity management

• Networking capability with other IoT/ AI solutions

Fig. 6.11 Success factors of IoT. Source: Wirtz (2018b, 2020b)

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213

IoT Key Competencies The first success factor is digital business model innovation and diversification competence. Here, the systematic development of the business model in the innovative IoT environment is important. This area is characterized by a high dynamic and innovation rate, which has special requirements for the design of the business model. In this connection, the emergence of business model innovations for customized IoT solutions is particularly important. In addition, the ability of existing IoT solutions in the business model to diversify into other industries and applications is essential to realize economies of scale and scope in the business model. The second success factor is system technology competence. Here, the technological combinability of software and hardware IoT solutions is of importance. This capability is particularly relevant to align and customize the IoT services and platform according to different customer needs (customization). An essential aspect of the competence system technology refers to the management of the IT platform and infrastructure. The IoT places special demands on the IT platform and IT services due to the variety and density of interaction with devices, connected objects, M2M interaction, or complex data computing. In connection with the system technology competence, data security plays a significant role. Since sensitive and proprietary data—for instance, company or personal data—are often used and subject to analysis, IoT customers demand a special level of security. This high level of data security must be ensured, especially against the background of potential cyberattacks and manipulations. The third success factor is the ability to integrate complex IoT services. Here, the horizontal and vertical integration ability at the application levels is particularly important. In the case of the horizontal integration ability, the above-mentioned technological combinability is relevant in order to combine the IoT core services with other services and technologies important to the customer into an overall IoT package and thus to provide an integrated service offering. It is also important to integrate the IoT solutions precisely into the existing ecosystem at the customer’s site. The vertical integration ability characterizes the compatible and functional interaction among the three different levels of the IoT IT infrastructure, which are depicted in Fig. 6.2. Furthermore, the complexity management of the integrated service offering is of importance due to the above-mentioned variety and density of interaction with devices, connected objects, the M2M interaction, or complex data computing in the context of IoT. The fourth success factor is the digital intelligence competence. Here, the development of intelligent IoT service solutions is particularly important. In this connection, artificial intelligence also plays a significant role. The accelerated development and application of AI-based software and analytics programs will enable high automation and control of the entire IoT process environment. Furthermore, the networking capability of developed IoT-based artificial intelligence and big data software and analytics is important, not only in connection with other customer

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IoT/AI solutions but also with those of other providers in the general process environment.

6.6

Summary

• The term Internet of Things refers to the Internet-based networking of physical and digital products, services, machines, sensors, and humans. • Essential for the IoT is an efficient IT infrastructure, as well as the integration of big data, cloud computing, and artificial intelligence. • The IoT IT infrastructure consists of three main layers: data centers, the M2M network/Internet infrastructure, and endpoints/connected objects. Unprocessed data and information is forwarded from the endpoints/connected objects via the M2M network/Internet infrastructure to the data centers, where it gets processed and then sent back to the endpoints/connected objects. • There are various application areas of the Internet of Things. IoT technology can be used in factories, in cities, in portable devices connected to the human body, in retail, at worksites, outside of urban areas, inside of vehicles, and in private homes or offices. • IoT technology has the highest economic impact in factories. • Important improvements that can be achieved when using IoT technology are improvements in planning and controlling, increased flexibility in production, faster time to market, improved quality, and higher customer satisfaction. • Still, there are challenges regarding the implementation of IoT technology in a business context, like the uncertain economic benefits and exceeding investment, insufficient qualifications of employees and an uncertain legal situation regarding the use of external data, as well as unresolved questions concerning data security. • Digital industrial automation is characterized by five development stages, ranging from assistance of a human operator through IoT systems to full automation without the need for human control. • The main areas of consumer IoT use are smart homes and smart cities. Especially younger age groups show interest in the use of IoT technologies in their everyday lives. • For a successful integration of IoT technology either in a business or a consumer context, it is important to have diversification competence, system technology competence, integration ability of complex IoT systems, and digital intelligence competence.

6.6 Summary

Chapter 6 Questions and topics for discussion

Review questions 1. Describe the concept of the Internet of Things. 2. Outline an IoT-specific IT infrastructure model. 3. Describe the different application possibilities of IoT and rank them according to their future market potential. 4. Explain the development stages of industrial automation in the field of IoT. 5. Present the success factors of the Internet of Things.

Topics for classroom discussion and team debates 1. The IoT has considerable potential for change in our economy. Discuss the advantages and disadvantages of the technological development of IoT for the economy. 2. Discuss whether IoT will cause another technological revolution in economy and society. 3. Will IoT lead to complete monitoring and digital control in all areas of life? Discuss the associated opportunities and risks for our economy and society.

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Artificial Intelligence, Big Data, and Cloud Computing

Contents 7.1 Artificial Intelligence Services and Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Artificial Intelligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Artificial Intelligence Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AI Applications and Use Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry-Specific Effects of AI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Opportunities and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Artificial Intelligence Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategic Four AI Governance Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Big Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relevance and Growth of Big Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Applications and Uses of Big Data Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Big Data Architecture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Cloud Computing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Location Independency, Scalability, and Elasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security and Vendor Lock-In . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three Types of Cloud Service Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

218 219 231 234 236 239 241 243 245 245 246 250 252 252 254 256 256

Learning Objectives By working through this chapter, you will be able to: 1. 2. 3. 4. 5.

Define artificial intelligence (AI) and describe aspects of AI. Explain opportunities and risks of AI with regard to different dimensions. Describe the strategic four AI governance model. Explain the seven layers of the big data architecture. Describe the different types of provision and service models of cloud computing and to what extent these differ in terms of the organizational IT infrastructure.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_7

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Artificial intelligence (AI), cloud computing, and big data are relevant concepts for IoT technology and considered key technological aspects of the twenty-first century. Due to their outstanding innovation and opportunity potential, they are increasingly finding their way into digital business. As a cross-sectional technological concept, AI is finding its way into all branches and areas of digital business and will change related structures and processes significantly and sustainably. This section describes basic applications and governance issues in the context of AI. First, the meaning and functioning of AI are described. In addition, the most important applications and the central opportunities and risks of AI are explained. Finally, the concept of AI governance is addressed. In this context, the different levels of AI-based governance and a strategic governance model are presented. For this purpose, a framework is presented that describes the four strategic components in AI governance. In Section 7.2, the concept of big data is introduced. This includes a general understanding of the big data architecture.1 The following section (Section 7.3) addresses aspects of cloud services as well as the provision and service models of cloud computing. Finally, three types of cloud service models are outlined.

7.1

Artificial Intelligence Services and Applications

Artificial intelligence (AI) is a field of application that has already been subject to discussion and development since the 1950s. At this time, intelligent hardware and software capable of technologically reproducing and automating human thought and behavior are central to development. The aim is to solve problems and support humans by means of intelligent analysis and interaction between human and computer systems. Almost all leading IT companies today are strongly engaged in the development or implementation of AI approaches. AI is not only important to search engines such as Google or Bing but in fact represents a crossover technology that takes almost all applications in the humanmachine interaction to a new level. Especially, voice-controlled applications such as Apple’s Siri, Microsoft’s Cortana, Amazon’s Alexa, or Google Assistant provide great potential in the context of AI implementation into everyday life. In light of the so far dominating text-based input in the context of the human-computer interaction, it becomes apparent that voice-based interaction has clear advantages in many application areas, as it allows multitasking approaches and is a natural form expression that requires no further training or constitutes little cognitive load. In addition, AI will play an important role in the context of decentralized processing and storage of data by cloud applications but also in practical fields such as self-driving cars, medical robots, and industrial production. In addition, big data applications require AI in order to intelligently utilize large datasets. Microsoft, for instance, has been working on AI that uses large datasets

1

See for the following chapter also Wirtz (2020b).

7.1 Artificial Intelligence Services and Applications

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since the early 1990s. Another example is Facebook with its huge and still growing pool of information on individuals. Facebook has two large AI-related departments, the Applied Machine Learning and the Artificial Intelligence Research Unit, which intensively explore and implement AI in Facebook applications. The same applies to Google, which has more than 1000 separate AI projects. Its CEO Sundar Pichai sees Google as an “AI-first company” (Wired 2017) and states: “Over time, the computer itself—whatever its form factor—will be an intelligent assistant helping you through your day. We will move from mobile first to an AI first world” (Eadicicco 2016). He further states: “In an AI-first world we are rethinking all our products” (Waters 2017).

Definition of Artificial Intelligence In order to fully understand the development and functioning of AI, it is important to create a common understanding of the terminology. The idea of AI is also coined by the work of Alan Turing. In 1950, he formulated an idea of how to determine whether a computer had a capacity for thinking equivalent to a human being (Turing 2009). This test was initially only a theoretical sketch and was only formulated more precisely after Turing’s suicide in 1954 after AI had become an academic subject as a subarea of computer science. Since then, this test has been very present in the discussion about AI and has repeatedly served to revive the idea of the thinking machine for the computer age. In the course of this test, a human interrogator, using a keyboard and a screen without visual or auditory contact, conducts a conversation with two people unknown to him. Thereby, one is represented by a human, and the other is represented by a machine. If, after the intensive questioning, the questioner cannot say which of the two the machine is, the machine has passed the Turing test. Thus it can be assumed that the machine has a thinking ability equal to that of a human being. Against this background, an AI must be able to sense, reason, engage, and learn at least to some extent. Despite the exceptional and far-reaching significance of AI, the literature is largely characterized by a heterogeneous understanding of the concept of AI. Table 7.1 lists various definitions of AI in academic research. In essence, all definitions presented refer to the characteristic of machine-based systems and human-like intelligent behavior. The AI tries to reproduce human thinking and learning and specially to imitate human problem-solving abilities to increase performance in a more efficient way. However, most definitions fall short of covering the full scope of the term. Therefore, an integrative definition of AI can be derived from the different definitions found in the literature.

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Table 7.1 Selected definitions of AI Author(s) McCarthy et al. (2006)

Rich et al. (2009) Russell and Norvig (2016)

Adams et al. (2012)

Rosa and Feyereisl (2016) Thierer et al. (2017)

Wirtz et al. (2019)

Definition The study is to proceed on the basis of the conjecture that every aspect of learning or any other feature of intelligence can in principle be so precisely described that a machine can be made to simulate it. [. . .] the study of how to make computers do things which, at the moment, people do better. AI may be organized into four categories: Systems that think like humans, Systems that act like humans, Systems that think rationally, and Systems that act rationally. [. . .] a system that could learn, replicate, and possibly exceed human-level performance in the full breadth of cognitive and intellectual abilities. [. . .] programs that are able to learn, adapt, be creative, and solve problems. The exhibition of intelligence by a machine. An AI system is capable of undertaking high-level operations; AI can perform near, at, or beyond the abilities of a human. This concept is further divided into weak and strong AI. [. . .] AI refers to the capability of a computer system to show human-like intelligent behavior characterized by certain core competencies, including perception, understanding, action, and learning.

Source: Wirtz (2020b)

Definition of Artificial Intelligence (Wirtz et al. 2019) AI refers to the capability of a computer system to show human-like intelligent behavior characterized by certain core competencies, including perception, understanding, action, and learning, in order to support human and systemic behavior in the best possible way. Besides the integrated general definition of AI, it is important to recognize and understand the complexity of AI. The concept of AI is highly sophisticated and can be differentiated according to various criteria. With regard to the fact that the development of AI is still in an initial stage of progress, one of the first and most meaningful differentiation refers to the stage of development of AI. These stages are largely associated with the independence of technology from human activity. This means that the more technology acts autonomously, the more independent it is and the less specific its field of application. Kaplan and Haenlein (2019) distinguish three subareas of AI according to the levels of independence: the super artificial intelligence, the general AI, and the narrow artificial intelligence. It is clear that the least independent and yet most specific approach to AI is a form that is less complex than other forms and more available. However, all AI is distinguishable from conventional processing as described in more detail later in this section. Figure 7.1 illustrates the three stages of AI development.

• • • • •

Specification level of solutions

Enhancement of performance and independence of AI systems

Fig. 7.1 Development stages of artificial intelligence

Narrow Artificial Intelligence

General Artificial Intelligence

Super Artificial Intelligence

• • • • • •

Operating in specific dedicated areas Superior to humans in specific, repetitive tasks Supports humans in carrying out their work Low substitution of jobs No ability to expand or improve abilities itself …

• Operating in many areas • Performs intellectual tasks with same efficiency as a human • Superior to humans in many areas, ability to combine its artificial intelligence skills • Moderate substitution of jobs • Ability to reason, improve and expand own abilities, comparable to humans •…

Operating in all areas Superior to humans in all areas Strong substitution of jobs Continuous and very fast self-improvement/extreme learning ability …

7.1 Artificial Intelligence Services and Applications 221

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The part that is called narrow AI refers to sophisticated artificial decision algorithms that are already applied in various IT companies. This part represents the least enhanced performance and independence of AI systems. Therefore, narrow AI is mostly applied in specified fields that have a clear scope of activity and require specific decision solutions. However, the decision algorithms incorporating a large pool of data usually lead to a superior performance than those of ordinary computer processes and humans that are occupied with similar tasks. Therefore, those AI approaches are operating in specific dedicated areas mostly in repetitive tasks, in which humans tend to take more biased decisions or become less reliable or concentrated over time. Moreover, such AI applications can also be used to support humans in carrying out their work. In this context, it is likely that one of the major fears associated with the application of AI, the substitution of jobs, does not apply as strongly with narrow AI as with more sophisticated AI approaches. This is also related to the fact that narrow AI is not able to expand or improve its own capabilities. Therefore, it is limited to very basic learning and not as much to selfimprovement. General AI is an AI area that describes a more autonomous technology. It represents a more enhanced performance and independence of AI systems than the above-described narrow AI. Therefore, general AI is applied in various fields with a large scope of activity that require automated decision solutions. General AI can perform intellectual tasks with same efficiency as a human but in a more efficient and reliable way. Thus, it is seen to be superior to humans due to its ability to combine various intelligence factors. It has the ability to reason, improve, and expand own abilities, which is comparable to human being. Due to their outperformance of humans in terms of efficiency and reliability, they are expected to substitute conventional jobs. The so-called Super AI is the most sophisticated form of artificial thinking. This part represents the strongest increase in performance and the strongest independence of AI systems from human intervention. Therefore, Super AI is believed to be able to do whatever task given by analyzing from large data and carrying out respective learning. Super AI can be operating in all areas and is superior to humans in every aspect. Such AI technologies have the strongest effect on the job market as they are able to substitute all tasks of today’s employees. This is due to their ability to continuous self-improvement. Another approach of differentiation is based on the learning approach. In this context, it is not an exclusive separation of terminology but rather a further specialization of the concept of AI, which refers to an automated repetitive learning that is usually based on natural language processing. The concept of machine learning can be understood as a part of AI. It refers to the idea of human-independent learning from a dataset of an AI technology. In the AI context, a basic approach to learning is to create the ability of reproducing regularities. The results are known through laws of nature or expert knowledge and are used to teach the system. A learning algorithm attempts to find a hypothesis that makes predictions that are as accurate as possible. A hypothesis is a figure that assigns the assumed output value to each input value.

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The method is therefore based on a predefined output, which is to be learned by analyzing data. The results of the learning process can be compared with the known correct results, i.e., supervised. If the results of the output are available in a continuous distribution, whose results can assume any quantitative values of a given range of values, one usually speaks of a regression problem. An example of such a regression problem is to predict the price development of houses based on certain variables or to determine the age of a person from other information about the person. Therefore, it is mostly about predictions. If, by contrast, the results are available in discrete form or the values are qualitative, this is referred to as a classification problem. An example here is to determine whether an email is spam or not. Unsupervised learning refers to machine learning without known targets and without environmental rewards. The learning machine tries to detect patterns in the input data that deviate from structureless noise. An artificial neural network orients itself by the similarity to the input values and adapts the weights accordingly. Different things can be learned. Popular is the automatic segmentation (clustering) or the compression of data for dimension reduction. There are also some approaches that are called semi-supervised learning, which incorporate methodologies of both supervised and unsupervised. Similarly, reinforcement learning refers to a set of machine learning methods in which an agent independently learns a strategy to maximize received rewards. The agent is not shown which action is the best in which situation but rather receives a reward at certain points in time, which can also be negative. Using these rewards, the agent approximates a utility function that describes the value of a certain state or action. The term is borrowed from psychology and has been used since the beginnings of cybernetics. Deep learning is a method of machine learning that uses artificial neural networks with hidden layers between the input and output layers, thereby forming an extensive internal structure. The concept is inspired by the biological understanding of brains, which is considered a special method of information processing. The problems solved in the early days of AI were intellectually difficult for humans but easy for computers to process. These problems could be described by formal mathematical rules. The real challenge to AI, however, was to solve tasks that were easy for humans to perform but whose solution was difficult to formulate through mathematical rules. These are tasks that humans solve intuitively, such as speech or face recognition. A computer-based solution for this type of task involves the ability of computers to learn from experience and to understand the world in terms of a hierarchy of concepts. Each concept is defined by its relationship to simpler concepts. By gathering knowledge from experience, this approach avoids the need for human operators to formally specify all the knowledge that the computer needs for its work. The hierarchy of concepts allows the computer to learn complicated concepts by assembling them from simpler ones. This is why this approach is called “deep learning.” It is difficult for a computer to understand the meaning of raw sensory input data, such as in handwriting recognition, where a text initially exists only as a

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collection of pixels. The transformation of a set of pixels into a chain of numbers and letters is complex. Multifaceted patterns must be extracted from raw data. Learning or evaluating this association seems insurmountably difficult if it had been programmed manually. Deep learning, a subset of machine learning, uses a series of hierarchical layers or a hierarchy of concepts to perform the process of machine learning. The artificial neural networks used in this process are built like the human brain, with neurons inter-connected like a network. The first layer of the neural network, the visible input layer, processes raw data input, such as the individual pixels of an image. The data input contains variables that are accessible to observation and hence constitute a “visible layer.” This first layer forwards its outputs to the next layer. This second layer processes the information from the previous layer and passes the result on as well. The next layer receives the information from the second layer and further processes it. These layers are called hidden layers. The characteristics contained in them become increasingly abstract. Their values are not specified in the original data. Instead, the model must determine which concepts are useful for explaining the relationships in the observed data. This continues at all levels of the artificial neural network. The result is the output in the visible last layer. This divides the desired complicated data processing into a series of nested simple mappings, each described by a different layer of the model. Against this background, deep learning is based on huge neural networks to learn complex patterns in large amounts of data. Despite the detailed understanding of the concepts and the functionality of deep learning, machine learning, and AI in general, it is important to have a broad understanding of the concepts, from a managerial perspective. Each concept is relevant to digital business ventures and thus should be considered in its respective field. Figure 7.2 outlines the different concepts (content based on Copeland (2016) and Wittpahl (2019)). Despite the description by differentiation according to stages and methods, AI technology can also be described along specific criteria that refer to the cognitive and memory levels of the technology. According to Joshi (2019), there are four functionality concepts that separate AI from conventional digital analytics and data processing: (1) self-awareness, (2) theory of mind, (3) limited memory, and (4) reactive machines. Self-awareness of an AI describes the ability of an artificial subject, which “can be literally said to understand and have cognitive states” (Searle 1980, p. 417). Therefore, it is assumed to think similar to a human or at least as a sophisticated living creature. Awareness in living creatures refers to a person or animal’s current situational consciousness of his, her, or its environment and the resulting implications. By considering the implications, awareness thus touches not only perceptual psychological phenomena (e.g., attention) but also social psychological processes (e.g., decision-making behavior of others). However, the question remains what status defines self-awareness. The concept of consciousness emergence refers to the idea that it arises with increasing cognitive competence: with rising complexity, a consciousness will automatically arise at some point. Such an increase in complexity can be achieved

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Artificial Intelligence • Automated repetitive learning • Natural language processing • Turing test

•…

Machine Learning • Supervised learning (classification, regression, forecasting)

• Unsupervised learning (clustering, dimension reduction) • Semi-supervised learning • Reinforcement learning •…

Deep Learning • Uses huge neural networks to learn complex patterns in large amounts of data • Inspired by our biological understanding of brains •…

Fig. 7.2 Methods of artificial intelligence

by increasing the sophistication of algorithms and the number of processing memory cells and the degree of inter-connectedness. In this context, it is possible to draw the analogy with brain cells, which is the basis for the creation of artificial neural networks. By reproducing a large number of artificial neurons that fire back and forth, a new quality of artificial consciousness can emerge. Considering the progress of processing capacity as well as the increase of data storage centers, modern machines can easily exceed human intellect. Moreover, the limits of human minds are not in the same sense given in technological approaches. Against this background, the abundance of data and the new way of processing makes AI potentially smarter than any human mind. Theory of mind (ToM) is a term from psychology and cognitive sciences. It describes the ability to assume about consciousness processes in other people and to recognize these in others. Such abilities can be to sense feelings, needs, ideas, intentions, expectations, and opinions in others. There is a difference between

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affective and cognitive ToM: the affective ToM describes the ability to recognize and understand the emotions of others, while the cognitive ToM is the ability to draw conclusions about the intentions of others. Alan M. Leslie sees the ToM as a mechanism of selective attention (Leslie 2000). Here, the existence of mental concepts is the basis for focusing attention on corresponding mental states of actors. In this way, these qualities can be tapped. There is also the concept of mentalization by Peter Fonagy. He defines the term mentalization as the ability to interpret one’s own behavior or the behavior of other people by attributing mental states (Fonagy et al. 2018). Through targeted processing of the data generated during the interaction with the user, an attempt is made to obtain information about the user’s thoughts and feelings and to use this information to predict the user’s future behavior. A mental AI is the next level of AI systems that is currently subject to research. An AI that lives up to the concept of ToM will be able to better understand the entities with which it interacts by recognizing their needs, emotions, beliefs, and thought processes. Artificial emotional intelligence is already an emerging industry and a field of interest for leading AI researchers. However, achieving AI that includes development in others at the level of the mind goes a step further. To truly understand human needs, AI machines must perceive people as individuals whose minds are shaped by a variety of social and emotional factors that can only be recognized by an empathic capacity. Another relevant concept in this context is the limited memory of machines. Such a limit is thus by nature the same for human and machine. Dealing with it is not a skill that has to be reserved for humans but can also be solved technologically. Reactive machines, similar to humans, can learn from historical data in order to make decisions. Today all existing AI applications fall into this category. Today’s AI systems that use deep learning, for example, are trained by large amounts of data that they store in their memory to form a reference model for solving future problems. For example, an image recognition AI is trained using thousands of images and their descriptions to teach it to name objects that it scans. When an image is scanned by such an AI, it uses the training images as references to understand the content of the image presented to it. Based on this learning experience, it is possible to describe new images with increasing accuracy. The recourse to previous computing power is thus a core concept of the AI and can be traced back to the limited memory. Figure 7.3 illustrates the four cognitive and memory levels of AI (content partially based on Joshi 2019). Despite the cognitive and memory levels of AI, there is an additional approach to distinguish the use of AI by the type of analytical activity. From a digital business perspective, respective analytical methods are traditionally covered by data mining and business intelligence, which is described in more detail in Section 7.2. However, AI, which can, to some extent, be understood as an autonomous form of big data analytics, draws on respective analytic concepts. The basis of any analytical activity is to understand what happens through historical information. This is covered by descriptive analytics, which helps to understand what happened, and by diagnostic analytics, which tries to understand

Limited Memory

Cognitive and Memor y Levels of Artificial Intelligence

Fig. 7.3 Cognitive and memory levels of artificial intelligence

Reactive Machines

• Short-term storage of data for future actions • Available data allow „smart“ reactions, for instance, to traffic conditions •…

Theory of Mind

• No storage of memories for future actions • Focused on current scenarios, giving best possible response •…

• Perception of the existence and relevance of others • Available data allow the AI system „human“ reactions, like understanding emotions, beliefs, needs of others, and human interaction •…

Self-Awareness

Artificial Intelligence is self-aware, like a human Data storage and processing capability exceeds human intellect Abundance of data makes AI smarter than any human mind …

• • • •

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why it happened. In this context, diagnostic analytics is a key concept of AI as it does not only describe information but has the ability to interpret historical data and reasons for what has happened. The next level is covered by three disciplines called advanced analytics. They try to use and add knowledge in order to make better decisions in the future, and they also provide additional insights. Predictive analytics uses historical data to predict future events, including those in the financial, security, economic, or mobility sectors. Historical data is used to derive a mathematical model that captures key trends. This predictive model is then applied to current data to predict what will happen next. Predictive analytics has received much attention in recent years as supporting technologies have made great strides, especially in the areas of big data and machine learning. Prescriptive analytics uses machine learning to make decisions based on predictions made by an algorithm. Prescriptive analytics works with predictive analytics, which uses data to determine short-term outcomes. In this context, it is created to help to make better decisions on any time horizon. Therefore, it can be regarded as an approach of advanced analytics, which uses machine learning to enhance decision-making processes mostly in a commercial context. Cognitive analytics is a field of analytics that attempts to imitate the human brain by drawing conclusions based on existing information and then reintegrating this information into the knowledge base for future conclusions. This creates a selflearning feedback loop. It mostly refers to the ability to apply a human-like intelligence for specific tasks. The idea is to reproduce the process of human reasoning for signal processing. In this context, deep learning can be considered a reproduction of human-like thinking as it uses artificial neural networks of artificial neurons that fire back and forth. Figure 7.4 illustrates the five analytical types of AI (content partially based on Decide Soluciones (2017) and Ulster University (2020)). Each of these disciplines uses statistical and mathematical techniques to achieve the proposed goals. They help to understand what and why something happens, what could happen, and what someone could do to make something specific happen. In addition, these techniques also focus on how to make human-like decisions. AI technologies can automate decision-making by guaranteeing the quality of those decisions and their contribution to the business. To make this possible, they all require large amounts of data. However, despite the availability of data and the general concepts of different aspects of AI, it is important to understand the basic approaches of AI functioning. The first approaches of AI were based on classical principles of mathematical logic. In propositional logic, simple logical operations such as AND, OR, and NOT can be combined, and statements can be assigned a truth content (TRUE, FALSE), whereas in predicate logic, arguments can be formulated and checked for their truth content. The first systems of AI were such logical representation systems that help to trace and prove simple conclusions. For instance, from the two statements—(1) “Yesterday was Tuesday” and (2) “We received the letter yesterday”—it can be concluded that: “The letter arrived on Tuesday.” AI systems based on logic are used for much more complex mathematical proofs and theorems and are still used today in modern AI applications such as IBM’s Watson (Lally and Fodor 2011) with the help of

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Data Analytics and XXXXXXXXXX Machine Learning

Machine Independence

Cognitive Analytics

• Application of human-like intelligence to specific tasks • Cognitive computing based on AI and signal processing •…

Prescriptive Analytics

• Use of data to make better business decisions on any time horizon • Advanced analytics using machine learning and business rules •…

Predictive Analytics

• Determine future performance based on current and historical data • Advanced analytics using machine learning •…

Diagnostic Analytics

• Interpretation of historical data (reasons for what has happened) • Business intelligence •…

Descriptive Analytics

• Interpretation of historical data (what happened) • Data mining •…

Fig. 7.4 AI analytics approaches

logical programming languages like Prolog (Colmerauer and Roussel 1996). This approach is sensible, because the capabilities of AI can be measured in terms of how well they play against humans. The advantage of these approaches is their usually simple system of rules and easily describable possibilities of action with, at the same time, almost unlimited variations depending on the situation. Chess, for example, has very simple rules but estimated 10120 possible moves. This very large number is beyond human imagination, and it is impossible to calculate all the possibilities in order to develop the perfect game strategy. This high number of possible moves is due to the fact that every decision, i.e., every possible move in chess, creates new decision alternatives and new moves but with different starting situations and so on. These decision variants can be described as a tree or a so-called graph, in which each hand or node represents a possibility—in the game this is a move—from which new and different ones arise to infinity. Just as a tree grows, the possible moves unfold in ever new branches and ramifications to the quasi infinity of all possible moves. Such a tree is called a decision tree, and whole areas of mathematics and computer science are concerned with the most efficient search in such branched graphs.

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A very effective way to search in decision trees is to use so-called heuristics. A heuristic is a procedure that determines the usefulness of a further in-depth search for every point in such a graph and thus prevents the best strategy from being searched for a long time—in the worst case infinitely long. In chess, this means that the possible moves are evaluated according to certain criteria and the possibilities resulting from obviously bad moves are no longer considered. Accordingly, heuristics lead to a decision tree being searched very specifically until a satisfactory result is obtained, which does not necessarily have to be the best possible result. In AI, decision trees and the associated heuristics are a very effective method for problems that can be described by a clear and unchangeable rule system. The first successes of AI in the field of logic and games were followed by attempts to extend the procedures to more general applications. In the 1970s, expert systems were developed which, via “if-then relationships,” attempt to transform a human knowledge base into information readable by computers. With the possibilities for logical conclusions and effective searching in these knowledge bases by means of heuristics, the systems initially had some success and raised great expectations for the possibilities of AI in the 1980s. A major disadvantage of these systems, however, is the great effort involved in capturing human knowledge and transforming it into the knowledge base required for the expert system. At the beginning of the 1990s, the great expectations of AI were disappointed: many companies that had previously bought expert systems for a lot of money abolished them. A large number of companies that had offered such systems disappeared from the market. These failures, together with a significant reduction of research funds in the field of AI from the late 1970s onward, led to the first and second phase of the so-called AI winter (Crevier 1993). Notwithstanding the aforementioned setbacks for research, in the 1980s the foundations were laid for the machine learning approach, which is so central today. The basic idea is simple: How do you get a computer program that has a specific task to learn from experience and use this experience to better fulfill the task in the future (Mitchell 2008)? The difference to a static program is that the decision rules adapt to what has been learned via feedback. Figure 7.5 illustrates the difference between conventional software programming and unsupervised machine learning [content based on Kirste and Schürholz (2019), Wittpahl (2019), Damron (2020) and DataRobot Inc. (2020)].

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Traditional Software Programming

Static Code

Input Raw Data

• Collection of data • Usually handling structured data only •…

Output

• Output according to defined code rules • For example, calculator software, like Microsoft Excel •…

• Code has been created manually • Deterministic process, strictly according to predefined rules •…

Machine Learning (Unsupervised)

Input put Raw Data

Interpretation

Algorithm

Processing

Output

Self-improvement

• Collection of data • Definition of target variable (desired result) •…

• Unknown output • No training dataset available •…

• Algorithm works independently • Recognizes data patterns (e.g.; through clustering, anomaly detection, association mining, and latent variable models) •…

• Creation of causality, links and patterns • Creation of hypothesis •…

• Target variable • Output is used to improve algorithm (automated optimization) •…

Fig. 7.5 Machine learning process vs. traditional software programming

Artificial Intelligence Framework AI has a broad range of applications due to its function as crossover technology. The consultancy Accenture has developed an AI framework that combines three core capabilities (sense, comprehend, act) with six technological forms of AI. Figure 7.6 illustrates this framework (content based on Accenture (2016)).2 AI comprises three core capabilities, (1) sense, (2) comprehend, and (3) act, which are characterized by an experiential learning ability and adaptability. The first core capability refers to the sensing or perception of the environment. AI-based technologies such as computer vision and audio processing are able to perceive certain aspects of the environment by capturing and processing images and

2

See for the following also Accenture (2016).

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Human

Core Capabilities

Comprehend

Act

Computer Vision

Natural Language Processing

Machine Learning

Audio Processing

…

Knowledge Representation

…

AI Technologies

Sense

AI Technologies

AI Technologies

Core Capabilities

Expert Systems

…

Illustrative Solutions

Digital Assistants & Speech Analytics

Predictive Analytics & Data Visualization

Cognitive Robotics & Systems

Virtual Agents

Identity Analytics

Affective Computing

Recommendation Systems

Knowledge Management Software

Intelligent Sensoric

Fig. 7.6 AI framework. Source: Wirtz (2018b, 2020b)

sounds. A good example in this connection is the use of intelligent facial recognition at self-serving terminals (smart border kiosks) in the context of border controls. The second core capability pertains to the comprehension of the information acquired from the environment. Technologies such as natural language processing and inference engines, which are developed by including procedures of knowledge representation, allow AI systems to analyze and understand the information collected. These technologies are used, for instance, in the context of language translation for search engines and smart speakers (e.g., Amazon Echo or Google Home). The third core capability refers to the action in terms of a physical activity. Technologies like machine learning, expert systems, or inference engines enable AI systems to take actions in a physical environment. Examples in this connection are, for instance, autopilot functions and intelligent braking systems of vehicles (Accenture 2016).

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Against the background of the abovementioned core competencies and AI-based technologies, there is a diverse range of applications of AI. In this connection, the field of digital assistants and speech analytics refers to software that is able to intelligently recognize and process spoken language. Here, one can use the digital voice control as a personal assistant. Common examples of these digital assistants are the software Siri by Apple, Cortana by Microsoft, Amazon Alexa, or Google Now. Virtual agents are animated graphical chatbots with human appearance that are usually displayed on websites and programed to interact with people. Companies deploy them particularly as virtual customer service employees in the context of customer relationship management. An example is the virtual agent Anna from IKEA. Recommendation systems are software-based recommendation services that filter information and seek to predict the preferences of users in order to give them recommendations on this basis. A good example in this connection is the company Amazon and its recommendation system with regard to book titles and other products. Predictive analytics and data visualization is another specific application area of AI and refers to the processing of large data volumes to make forecasts and create meaningful visualizations. Here, for instance, machine learning as a subarea of AI plays an important role. The use of AI in the context of predictive analytics supersedes the selection of the right mathematical algorithm because the machine provides the correct solution based on its AI algorithms. IBM’s Watson Analytics platform serves as a good example in this connection since it offers intelligent automated predictive analytics and data visualization. Identity analytics is another application area of AI and represents a combination of big data, advanced analytics, and identity access management (IAM) to manage access of IT systems and automate risk-based identity controls. In this area, AI-based machine learning technologies are also applied to better protect IT systems and identities. The application of identity analytics by credit card companies (e.g., VISA) in the context of fraud detection is a particularly relevant example in this connection. Knowledge management software serves companies to generate and systematize knowledge and addresses the way in which companies collect, store, access, and share information. In doing so, it applies AI-based methods such as natural language processing, machine learning, or expert systems, for instance, for automating recognition and comprehension of information or words, as well as in the context of intelligent search. Examples of knowledge management software are Bloomfire, Intelligence Bank, or Oxcyon. Cognitive robotics and systems refer to adaptive robots or systems with cognitive intelligence. AI-based techniques help robots and systems to analyze information in order to generate a knowledge map. An example in this context is the service robot Relay by Savioke, which is used in hotels as room service, for instance. Affective computing pertains to learning systems that have emotional intelligence and can automatically recognize and understand human expressions of emotion. AI-based techniques assist, for example, in the recognition of facial expressions and speech. In

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this context, the company Affectiva, for instance, is developing AI-based technology products for the detection of emotions. Intelligent sensor technology describes the intelligent acquisition and processing of measured values by means of sensors. AI-based techniques such as expert systems or neural networks support the sensors in their learning ability and adaptability. Intelligent sensor technology is applied in almost all areas of IoT and particularly plays a prominent role in the context of industrial Internet of Things (IIoT) (for more information of IIoT, see also Section 6.3). An example in this context represents the intelligent sensors that are attached to components of industrial machinery and are able to automatically identify wear patterns as well as preventively initiate a maintenance and repair process.

AI Applications and Use Cases Based on the abovementioned illustrative AI solutions, a classification of AI applications can be derived and merged into a superordinate concept in terms of an overview of AI applications. Table 7.2 presents such an overview, describing the different AI applications with their value creation and functional proposition as well as respective use cases in business practice (content based on Wirtz et al. 2019). AI has a wide range of applications due to its function as cross-sectional technology. The AI applications shown in Table 7.2 are used by companies in all economic sectors.

Table 7.2 Potential AI applications and use cases AI Application AI-Based Knowledge Management Software

AI-Based Process Automation Systems

AI Value Creation and Functional Proposition • Generation and systematization of knowledge—gather, sort, transform, record, and share knowledge • Natural language processing, machine learning, and expert systems can support the codification of knowledge • Use of neural networks enables to analyze, distribute, and share knowledge with others • ... • Automation of standard tasks; perform formal logical tasks with unpredictable conditions in consistent quality • Complex human action processes (formal logical or dangerous tasks) can be transferred to automation systems, which can support humans in performing tasks

Use Cases • Decision support for corporate management in the context of big data analyses • Knowledge transfer during induction of employees • Preservation and management of knowledge during generational change of employees • ... • Automated image diagnostics in medicine • Automation and optimization of product development and production • Optimization of environmental plants • ... (continued)

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Table 7.2 (continued) AI Application

Virtual Agents

Predictive Analytics and Data Visualization

Identity Analytics

Cognitive Robotics and Autonomous Systems

AI Value Creation and Functional Proposition • May include rule-based assessment, workflow processing, schema-based suggestions, data mining, case-based reasoning, intelligent sensor technology • Robotic process automation has emerged as a subarea through further technology innovations. This leverages the ability of software robots or AI-driven workers to mimic human interaction with user interfaces of software systems • ... • Computer-based system that interacts with the user by means of speech analytics, computer vision, and written data input • May also include real-time universal translation and natural language processing systems and affective computing • Software that can perform tasks for humans • Subareas are chatbots and avatars • ... • Analytics are based on the quantitative and statistical analysis and meaningful visualization of large amounts of data for forecasting purposes • Processing of big data for reporting, prescriptive analysis, and predictive analysis • Machine learning as a technical subarea based on algorithms that can learn from data • ... • Software combined with big data, advanced analytics, and identity access management to control access to IT systems and automate risk-based identity checks • May include deep learning and machine learning, affective computing, and artificial immune systems • ... • Systems with higher-level cognitive functions that involve knowledge representation and are able to learn and

Use Cases

• Recruiting chatbot • Automated customer correspondence • Purchasing and consulting assistants • ...

• Medical diagnostics • Predictive maintenance in production • Financial forecasting, price optimization, and sales forecasting • ...

• Customer recognition in shops • Face recognition for identification of persons • Security robot for monitoring airports • ... • Automated driving • Robot-assisted surgery (continued)

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Table 7.2 (continued) AI Application

Recommendation Systems

Intelligent Personal Assistants

Speech Analytics

Cognitive Security Analytics & Threat Intelligence

AI Value Creation and Functional Proposition respond • Sometimes in connection with affective computing to determine and adapt human behavior as well as respond to respective emotions • ... • An information filtering system • Software-based systems that screen personalized information to predict preferences of individuals • ... • Software based on speech analytics • Digital voice control enables functionality of a personal digital assistant • Providing an intuitive interface between a user and a system/device to search for information or complete simple tasks • ... • Software for intelligent recognition and processing of language • Understand or respond to natural language • Translate from spoken to written language or from one to another natural language • May include real-time universal translation and natural language processing systems • ... • Additional application for cognitive technologies to analyze security information through natural language processing and machine learning • Interpret and organize information and provide reasoning • ...

Use Cases • Care robots • ...

• Personalized marketing • Product recommendations • ... • Smart procurement assistants • Driving assistance • Assistants for visually impaired people • ...

• Universal real-time translation of language and text in personal communication • Administrative workflow support by translating speech into text • Bot for the care of refugees • ... • Behavior pattern recognition for higher IT security • Monitoring of financial transactions • Sample diagnoses for better fraud detection • ...

Source: Wirtz (2020b)

Industry-Specific Effects of AI The use of these AI applications is characterized by considerable economic potential and effects that differ across the various economic sectors. Against this background, Table 7.3 shows the AI-related automation potential, potential productivity, and demand effects from AI and AI use cases with high potential for selected industries.

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Table 7.3 Industry-specific potential and effects of AI

Industry Production

Automation Potential (%) 60

Effect on Productivity (%)a 8.3

Effect on Demandb 2.2

Transportation & Logistics

60

7.0

3.2

Retail trade

53

13.2

3.0

Energy & Supply

44

6.8

2.2

Finance

43

8.4

3.3

Technology, Media and Communication

41

9.9

3.1

Health & Social Affairs

36

27.9

3.7

Use Cases with High Potential Benefit • Improved monitoring and automatic adjustment of production processes • Optimization of production and supply chain • On-demand production • Autonomous deliveries and transportation by trucks • Better traffic control and congestion reduction • Increased road safety • Better personalization and customization in design and production • Improved forecasting of product demand • Optimization of inventory and delivery management • Intelligent meters and measuring systems (smart metering) • Higher efficiency of network operation and storage • Predictive maintenance of the infrastructure • Better personalization of financial planning • Optimizing the prevention and detection of money laundering and fraud • Automated customer business • Improved archiving, search, and media recommendations • Generation of custom content • Better personalization and customizing for advertising and marketing • Better diagnostic support • Improved early detection of potential pandemics • Improved image diagnosis

Data source: PwC (2017, 2018a, b), McKinsey (2017b), Wirtz and Weyerer (2019c), Wirtz (2020b) Growth of gross domestic product (GDP) through AI in Germany in percent b Values are based on the AI impact index valuation of PwC. The scale ranges from “1” to “5,” with “1” being the lowest potential impact of AI on demand and “5” the highest a

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Of particular economic importance is the AI-related automation potential, which describes the proportion of work activities that can be automated using AI. The production and transportation and logistics sectors each have the highest automation potential with 60% each and, together with retail trade (53%), form the top group. The sectors energy and supply, finance, as well as technology, media and communication each form a homogeneous middle field with just over 40%. This is followed by the health and social affairs sector with 36% (McKinsey 2017b). Furthermore, the potential productivity effect and demand represent central aspects with regard to the economic contribution of AI. The productivity effect results primarily from the automation of routine tasks and the AI-based skills enhancement of the staff, which can therefore concentrate more on value-adding activities (PwC 2017). The productivity effect can be represented by the AI-based growth of the gross domestic product (GDP) in the respective industries. The greatest productivity effect is achieved with 27.9% in the health and social sector. The retail industry follows clearly behind with 13.2%. The sectors technology, media and communication, finance, production, transport and logistics, as well as energy and supply showed similar productivity effects, all of which ranging between 7 and 10% (PwC 2018a). The demand effect describes the demand and consumption effects of AI. The AI-based increases in productivity, time savings, and improvements in the quality and personalization of products and services lead to an increase in demand and changes in consumer behavior (PwC 2017). The AI-based demand effect can be illustrated by means of the AI impact index assessment of PwC. The strongest demand effect is seen in the area of health and social affairs (3.7). The areas of finance, transport and logistics, technology, media and communication, and retail trade are each characterized by a similar demand effect with a value between 3.0 and 3.3. The areas of production and energy and supply have the lowest demand effect with a value of 2.2 (PwC 2017). Based on the automation potential as well as the productivity and demand effect, particularly promising use cases with high benefit potential can be derived for the individual industries. In the area of production, improved monitoring, automatic adjustment of production processes, optimization of the production and supply chain, and on-demand production are particularly noteworthy. In the field of logistics and transport, autonomous deliveries and truck transports, better traffic control and congestion reduction, as well as increased traffic safety are applications with high potential benefits. The use cases with particularly high potential benefits in retail relate to better options for personalization and customizing in design and production, improved forecasting of product demand, and the optimization of inventory and delivery management. In the field of energy and supply, intelligent meters and measuring systems (smart metering), the higher efficiency of network operation and storage, as well as predictive maintenance of the infrastructure (predictive maintenance) are associated with a high benefit potential.

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The financial industry benefits in particular from improved personalization options for financial planning, the prevention and detection of money laundering and fraud, and automated customer business. In technology, media and communication, the improved archiving, search and recommendations of media, the generation of custom content, and the better possibilities of personalization and customizing in advertising and marketing are characterized by high potential benefits. Finally, promising use cases in the health and social affairs sector relate in particular to better diagnostic support, improved early detection of potential pandemics, and improved image diagnosis (PwC 2018b). Against the background of this industry-specific potential and effects of AI, it can be seen that AI opens up considerable opportunities for both companies and society. At the same time, however, the use of AI is associated with considerable risks that can endanger the success of AI projects.

Opportunities and Risks Accordingly, a comprehensive understanding of AI-related opportunities and risks is essential, especially for companies, in order to ensure successful and beneficial use of AI. Table 7.4 therefore compares key opportunities and risks of AI (content based on Wirtz and Weyerer 2019b). Here, it is evident that the AI-related opportunities in the social and ethical area relate primarily to the increase of traffic safety and public safety, as well as improved medical diagnostics and early detection of pandemics, while the AI-related risks refer in particular to moral dilemmas of autonomous AI applications or the discrimination of people by AI algorithms (Wirtz et al. 2020). The opportunities in the legal and regulatory area lie primarily in improved legal case analysis and forecasting of court decisions. The main risks in this context are the loss of control due to a lack of governance of AI systems, the threat to cybersecurity, and data protection posed by AI cyberattacks, as well as unclear responsibility and liability for AI-based decisions and actions. In addition, technological and implementation-oriented opportunities relate in particular to improved AI-based data and information processing and the resulting more efficient allocation of resources. They also relate to higher IT security through improved AI-based behavior pattern recognition, as well as enhanced access to the Internet and digital services by means of AI-based personal assistants. Key technological and implementation-oriented risks include the loss of control over technologically autonomous AI systems, security problems and the failure of the AI system in mission-critical and life-critical situations, the lack of specialization and expertise associated with the shortage of AI specialists, and the high entry, transition, and implementation costs. Finally, the business opportunities of AI refer in particular to the release of labor capacity and increased productivity through the automation of repetitive activities as

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Table 7.4 Opportunities and risks of AI Dimensions Social & Ethical

Opportunities • Increased road safety and time savings for people through selfdriving vehicles based on AI (e.g., Waymo) • Improved medical diagnostics and early detection of pandemics through AI systems (e.g., IBM Watson) • Increased public security by means of AI-based video surveillance and pattern recognition (e.g., ivisX) • ...

Legal & Regulatory

• Improved legal case analysis through AI-based e-discovery software (e.g., Exterro) • Prediction of judgments with high accuracy by AI systems (e.g., case crunch) • Improved risk assessment of the likelihood of recidivism of offenders through AI systems and reduction of the prison population • ... • Improved AI-based data and information processing enables efficient and sustainable resource allocation • Higher IT security through improved AI-based behavior pattern recognition • Faster and easier access to the Internet and digital services using AI-based personal assistants (e.g., Amazon Alexa, Google Assistant and Duplex, Siri from Apple, or Microsoft’s Cortana) • ... • Free up work capacity and increase productivity by automating repetitive tasks using AI-based process automation systems and virtual agents • Rationalization and process optimization through AI systems • Considerable efficiency advantages through AI-based IoT applications • Improved AI-based data analysis and improved financial and sales

Technological & ImplementationOriented

Economic

Risks • Moral dilemmas of autonomous AI applications • Discrimination of people by AI algorithms • Lack of compatibility between mechanical and human value judgment • AI-based rule-setting for human behavior without a normative-ethical basis • Global technological arms race, especially in the military sector (e.g., AI-based autonomous weapons) • ... • Technology obedience and loss of control due to lack of governance of autonomous intelligent systems • Threat to cybersecurity and data protection through AI cyberattacks • Unclear responsibility and liability for decisions and actions of AI systems • ... • Loss of control over technologically autonomous AI systems • Security problems and failure of the AI system in mission-critical and life-critical situations due to immaturity of the AI-technology and lack of experience • Lack of specialization and expertise as well as a lack of skilled workers • High entry, transition, and implementation costs • ... • Social resistance of workers to the introduction of AI systems • Loss of management and control of business processes due to transformation of human-machine and machine-machine interaction and increased autonomous AI automation • Lack of social and customer-related acceptance and low trust into AI systems and manufacturer through (continued)

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Table 7.4 (continued) Dimensions

Opportunities

Risks

forecasting creates significant efficiencies and better management decisions • ...

AI failures • Substitution and transformation of the labor market and unemployment, especially in production and manufacturing industry • ...

Source: Wirtz (2020b)

well as rationalization and process optimization. The efficiency gains through AI-based IoT applications as well as the efficiency advantages and better management decisions resulting from the improved data analysis and forecasting options are also of central economic importance. The economic risks posed by AI relate in particular to the social resistance of employees to the introduction of AI systems and the loss of management and control of business processes as a result of increasingly autonomous AI automation. In addition, the lack of social and customer-related acceptance and the low level of trust in AI systems and their manufacturers must also be mentioned in this context, just as the substitution and transformation of the labor market and the associated threat to jobs. Due to the diverse and serious risks posed by AI to companies and society, the regulation or strategic governance of AI is of particular relevance to companies to ensure the success of their AI projects. In the following section, the governance aspect of AI is examined in more detail.

Artificial Intelligence Governance A central consideration in this context is the increasing automation and independence of AI from humans, which also means an increase in AI-based governance. Figure 7.7 illustrates different levels of AI-based governance. Five main levels can be distinguished (Miller 2019). At the first level, “humanled,” AI, or IT plays a subordinate role and is only used partially in the context of gaining knowledge. The decision-making and the resulting actions are taken exclusively by humans on the basis of experience and rules (Miller 2019). In the second stage, “human-led machine-assisted,” a variety of AI/IT solutions are used in the context of knowledge generation. Humans are supported in decisionmaking by AI machines, which are, however, still characterized by a limited capacity for optimization. The execution of the resulting actions is still exclusively in human hands. At the third level, “AI machine-led human-assisted,” knowledge is gained by AI machines and is subject to human evaluation or guidance. This also involves fully optimized decision-making or support by AI machines under human supervision. At

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Levels of AI-Based Governance

Human-Led

• Limited role of AI/IT in the process of knowledge generation • Experience- and rule-based decision-making and respective action by people

Human-Led AI MachineAssisted

• Gaining knowledge through a variety of AI/IT solutions • AI-supported decision-making with limited optimization capabilities and respective action by humans

AI Machine-Led Human-Assisted

• AI-managed knowledge generation with human evaluation or guidance • AI-managed, fully optimized decision-making or support • Human acts under supervision of AI machine and vice versa

AI MachineControlled Machines

• Fully optimized AI-managed knowledge generation, evaluation, decision-making and control of machines • Machine acts automatically without human supervision

AI MachineControlled Humans

• Fully optimized, AI-managed knowledge acquisition, evaluation, decision-making and control of humans • Machine acts automatically without human supervision

Fig. 7.7 Levels of AI-based governance. Source: Wirtz (2020b)

the action level, both the AI machine can act under human supervision and the human can act under the supervision of the AI machine. In the fourth stage of AI-based governance, “AI machine-controlled machines,” the AI machine acts completely autonomously, ensuring fully optimized knowledge acquisition as well as associated evaluation and decision-making. On the action level, the AI machine independently controls other machines and thus acts fully automatically without human influence and supervision. The fifth level of AI-based governance, “AI machine-controlled humans,” corresponds to the previous level in terms of the degree of autonomy and automation with the significant difference that the AI machine no longer only controls and manages other machines but also the humans themselves (Miller 2019). A clear classification of the current state of development of AI proves to be difficult. The development of AI is still in its infancy, and most AI applications are at

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the “human-led AI machine-assisted” level, so that the current state of development is more likely to be at the second level “human-led AI machine-assisted.” In some cases, however, AI applications such as chatbots are already in use, which can be assigned to the “AI machine-led human-assisted” level. For this reason, the current AI development with regard to the stages of AI-based governance can also be seen as a transition phase to the third stage “AI machine-led human-assisted.” However, given the considerable and very rapid technological progress in the field of AI, it can be assumed that the level of development of AI will establish itself at the third stage in the coming years and that even the achievement of the subsequent stages seems to be only a matter of time. In view of this development and the associated risks presented by AI for companies and society, the topic of strategic governance of AI is increasingly coming to the fore from a company perspective, in order to ensure the security and success of AI-based activities. For companies, strategic AI governance represents a kind of management tool in the form of a higher-level framework for managing and controlling AI-related activities, systems, and processes as well as their effects.

Strategic Four AI Governance Model Against this background, the strategic four AI governance model in Fig. 7.8 summarizes the risks described above and presents four specific governance countermeasures and the strategic AI governance agenda (content based on Wirtz and Weyerer 2019b). First, the social and ethical risks associated with AI require a codification of ethical AI standards and rules. Maintaining human control over ethical aspects related to the AI system, embedding ethical values in AI decision-making, and protecting the autonomy and freedom of the individual are of particular importance (Wirtz and Müller 2019). It is also important that companies consider the entire socio-technical infrastructure and value chain in the context of AI, as this is also characterized by social and ethical aspects. Other key AI governance tools in the social and ethical field are an AI code of ethics and an AI ethics committee, which ensure that ethical principles are adhered to in the context of AI activities (Thierer et al. 2017). In addition, the setting of AI restrictions and limits is another important governance tool in the context of all types of AI risks (Wirtz and Müller 2019). Restrictions are necessary in particular with regard to the technical-functional design of the AI system in order to avoid autonomous AI decision-making that is completely detached from human control. A collaborative problem-solving approach seems promising in this context, where problem definition and verification of the problem solution are done by humans and the problem solution is provided by the AI system (Eggers et al. 2017).

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Codification of Ethical AI Standards & Regulations

• Definition of AI change management strategy and goals • Transparent communication of the goals and activities of AI change management • Integration of key stakeholders into the AI change management process •AI-specific competence development of the employees • Promotion of an interdisciplinar y orientation and AI culture •…

•Definition of AI applications & AI responsibilities taking into account the codified guidelines •Roadmap and action plan for AI implementation & application •…

Definition of AI Limits & Restrictions

Strategic AI Governance Agenda

Legal and Regulatory Risks

•Avoidance of autonomous AI decision-making detached from human control •Limitation of the technical-functional AI system design •Collaborative problem-solving approach: problem definition and verification of problem solving by humans vs. machine problem solving by AI system •…

AI Change Management Guidelines

Social and Ethical Risks

•Maintaining ethical control over AI system •Embedding ethical values in AI decision-making •Protection of the autonomy and freedom of choice of the individual •Consideration of the entire socio-technical AI infrastructure •Development of an AI code of ethics and establishment of an AI ethics commission •…

AI Data Requirements & Analysis Guidelines

Business and Economic Risks

•Development of verifiable, fair and nondiscriminatory AI algorithms and systems •Transparent collection, processing and utilization of AI data •AI control interface for documentation of AI processes •Measures and mechanisms for data quality assurance •…

Technological and ImplementationOriented Risks

Fig. 7.8 Strategic four AI governance model. Source: Wirtz (2020b)

Another key measure in strategic AI governance relevant to all forms of AI risk is the establishment of AI data requirements and analysis guidelines. Data is essential for the learning ability and performance of AI systems, since their application logic and algorithms are based on the collection, processing, and utilization of considerable amounts of data (big data) (Thierer et al. 2017). Such requirements and guidelines shall be used for the development of verifiable, fair, and non-discriminatory AI algorithms and systems and for the transparent collection, processing, and use of AI data (Thierer et al. 2017). The establishment of an AI control interface for the documentation of all AI processes seems promising in this context (Wirtz and Müller 2019). In addition, measures and mechanisms for quality assurance of the data are necessary to avoid undesired results due to incorrect data. Finally, especially against the background of the business risks associated with AI, the definition of an AI change management strategy and corresponding

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objectives is important. This involves above all the transparent communication of the goals and activities of AI change management, as well as the integration of key stakeholders in the AI change management process. In addition, AI-specific competence development of employees and the promotion of an interdisciplinary orientation and AI culture are important governance aspects in this context. Taken together, these four specific governance countermeasures form the basic framework for action in the strategic AI governance agenda. This agenda determines the AI-related applications, activities, and responsibilities and provides a roadmap and action plan for the implementation and application of AI systems for companies. In summary, it can be stated that the importance of AI for enterprises and their competitiveness will continue to increase. As a cross-sectional technology, AI is characterized by a particularly broad range of applications and a very large potential for opportunities. At the same time, however, there are also considerable risks and challenges associated with AI, which require systematic and effective governance and regulation. Due to the human-like intelligent behavior of AI in terms of the reproduction of human thought and learning as well as corresponding problemsolving abilities, AI has a particular influence on the development of information technology applications at the human-machine interface.

7.2

Big Data

The development of AI approaches is based on a sophistication of data analysis itself. With the digital revolution and the ever-increasing processing capacities, there is also a revolution in data analysis approaches. The application of these big data analysis methods is becoming more and more important for digital business companies to survive in competitive digital markets. The following section provides information about the increasing relevance and introduces the application of these big data analysis methods.

Relevance and Growth of Big Data The concept of big data has gained increasing importance in recent years. Big data represents an essential technological foundation of IoT since an intelligent and systematic analysis and evaluation of the data provided by IoT is relevant to success. Big data is one of the fastest growing information technology sectors worldwide. For example, global big data market sales for software, hardware, and services are expected to increase from 42 billion USD in 2018 to 103 billion USD in 2027, representing an annual growth rate of just over 10% (Kobielus 2018). Big data refers to the processing of large and often complex data volumes in real time. The increasing digitization of all life and business areas and the associated exponential growth of data worldwide are the starting point for this development and the establishment of the big data concept. According to expert estimates, the

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global volume of data will more than quintuple in the next few years, rising from 33 zettabytes in 2018 to 175 zettabytes (1 zettabyte equals 1 billion gigabytes) in 2025 (Reinsel et al. 2018). The analysis of these very large amounts of data (big data) gives companies considerable potential for added value and has become a decisive competitive factor for them. Traditional relational database systems are not able to process these considerable amounts of data in a meaningful way, which can only be handled by specific big data applications. Big data applications are far superior to traditional relational database systems in terms of data velocity, data volume, and data variety. In this context, data velocity describes the speed at which data is generated, processed, and transferred, whereas data volume represents the quantity or size of the data. Data variety refers to the diversity of the collected data and data formats.

Applications and Uses of Big Data Analyses Against this background, big data represents an essential technological basis for digital business, as an intelligent and systematic analysis and evaluation of data information is relevant to the success of digital business. For this reason, a large number of companies now use big data analyses. In this context, Fig. 7.9 shows the use of big data analyses in companies.

First considerations have been initiated 10%

No planning or activities yet 6%

Regular use 38%

Concrete planning process 14%

Scheduled roadmap exists 9%

Use in pilot projects 23%

Fig. 7.9 Application of big data analytics in business practice. Data source: techconsult (2018)

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More than half of the companies use big data analysis. This is already regularly the case in 38% of the companies, and in 23% the application is still carried out in the context of pilot projects. About one-third of the companies are in the planning and reflection process, and a small minority of 6% do not have any planning or activity related to big data analysis (techconsult 2018). These figures on the application or distribution of big data analyses in companies show that big data is still in an early development phase in practice. The use of big data analyses in companies covers various areas of application (see Fig. 7.10).

Not declared

2,4%

Observation of the market

26,2%

Implementation of new business models

26,2%

Identifying new business models

32,1%

Increasing operational excellence of internal processes

58,3%

Increasing operational excellence of customer-centric processes 0%

72,6% 10%

20%

30%

40%

50%

60%

70%

80%

Share of Companies

Fig. 7.10 Areas of application for big data in companies. Source: Capgemini (2018)

This shows that the main purpose is to increase the operational excellence of customer-centric processes (73%) and internal processes (58%). Other important application purposes are the identification of new business models (32%), the implementation of new business models (26%), as well the observation of the market (26%) (Capgemini 2018). Digital business provides a variety of data (e.g., data from business transactions or social media, sensor and log data, RFID-supported movement data, or traffic data), which are processed by means of big data analyses into important decisionrelevant findings, for example, on business processes. In this context, Fig. 7.11 summarizes the most important data that are processed by companies in big data analyses. Based on the combined collection and analysis of this data, there is a wide range of benefits that companies can achieve by means of big data. From a business perspective, these include improved decision-making (37%), improved collaboration and information sharing (34%), increased productivity (33%), and improved agility to respond quickly to market changes and identify opportunities (32%) (techconsult 2018). Further significant business benefits from using big data include

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Smart grid

28%

Health data

27%

48% 50%

Smart building

32%

Social media contributions

31%

51% 56%

Audio

35%

Video

34%

59% 61%

Machine data

46%

Product data

45%

63% 64%

39%

Location data

66%

37%

Pictures

74%

42%

Internet logs / Cookies

78% 56%

Transaction data

79%

43%

Connection data

79%

Software logs

50%

Hardware logs

49%

80% 82%

51%

Text documents

85% 70%

Existing databases 0%

20%

Big Data Analyses

40%

60%

92%

80% 100% Share of Companies

Data Collection

Fig. 7.11 Data processed by companies in big data analyses. Data source: techconsult (2018)

higher reliability and security (31%), increased customer satisfaction and loyalty (30%), and lower costs and increased business efficiency (30%). Figure 7.12 summarizes the various business benefits of applying big data (Capgemini 2018).

5%

10%

15%

Fig. 7.12 Advantages of using big data from a company perspective. Source: Capgemini (2018)

Improved decision-making

Improved collaboration/ information sharing

Improved productivity

Improved agility to react to changes in the market/ identify opportunity

Added reliability and security

20%

25%

35%

40%

37%

Share of Companies

30%

34%

33%

32%

31%

30%

26%

25%

Improved customer satisfaction/retention

0%

22%

30%

1%

Reduced costs and increased operational efficiencies

Compliance readiness/ reduced risk

Increased revenue

Improved employee retention/moral

Others

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Big Data Architecture In order to capture and analyze the diverse and large amounts of data characteristic of big data and to generate the aforementioned benefits from it, a powerful big data platform is necessary that is capable of handling the requirements in terms of data volume, data velocity, and data variety. For the architecture of big data platforms, different applications such as the open-source framework Hadoop or Cloudera are employed. A typical big data architecture is shown in Fig. 7.13 and is described below (content based on Singh 2013; Mezghani et al. 2015; Wang et al. 2015a). The big data architecture consists of seven layers: (1) data sources, (2) data content format, (3) data type, (4) data acquisition, (5) data management, (6) data analytics, and (7) data visualization. The first layer includes all data sources necessary to generate insights that are required to improve business operations or to solve a business problem. In the context of big data, the sources, content formats, and types of data distinguish themselves through a particular variety. Data can arise and be collected, for instance, from sensors, applications/machines, social media, and business transactions. The second layer refers to the content format in which data may occur. Data can be present in structured, unstructured, and semi-structured form. While structured data is characterized by a predefined format and can be easily processed, unstructured data does not have a formalized structure, and their processing is difficult. Semi-structured form lies between these two extremes and only shows a formalized structure to a certain extent (Phillips-Wren 2014). The third layer refers to the data type that is determined by the origin of the data. In principle, data can arise from transactions (transactional data), interactions (interactional data), and observations (observational data). Transactional data are, for instance, historical structured data from important business application systems. Interactional data are, for instance, data collected from social media platforms (e.g., Facebook, LinkedIn, and Twitter) or web content such as images, videos, blogs, and clickstreams. Observational data are IoT-based data such as streaming data or machine-generated data captured by means of sensors, RFID, or GPS technology. The fourth layer refers to data acquisition and represents the starting point of the big data administration process. Here, the focus is on reading the data that comes in from various data channels at different speed and in different frequencies, sizes, and formats. Depending on the data source, different processing methods are deployed (e.g., batch processing or complex event processing). In the fifth layer, the actual big data management takes place by means of respective big data technologies. Depending on the type of data and data sources, different technologies are applied, for instance, the open-source framework Hadoop, the non-relational NoSQL database HBASE, or a traditional relational database management system (RDBMS). The sixth layer of the big data architecture refers to the analysis of data. Here, there are also different forms of analytics that one can choose, depending on the data type, data sources, and processing mode. In this connection, the field of predictive

…

Unstructured

…

Transactional

Interactional

Big Data Governance

…

Batch ETL Tool

Social Media API

Complex Event Processing

Data Acquisition

Fig. 7.13 Exemplary illustration of a big data architecture. Source: Wirtz (2018b, 2020b)

…

Business Transactions

Social Media

SemiStructured

Observational

Structured

Sensors

Applications/ Machines

Data Type

Data Content Format

Data Sources

…

RDBMS

NOSQL/HBASE Database

Descriptive Analytics

HADOOP Map/Reduce

…

Prescriptive Analytics

Predictive Analytics

Diagnostic Analytics

Data Analytics

Data Management

…

Reporting Dashboard

Real-Time Monitoring

Graphs/ Charts

Data Visualization

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and prescriptive analytics has particularly gained in importance in the context of big data that focus on making forecasts and providing guidance on how to act with regard to a future event, respectively. Data visualization represents the last step of the data administration process and the big data architecture. Depending on the source, type, and processing mode of data, one can choose among different forms and tools of visualization, such as graphs/charts, real-time monitoring, or a reporting dashboard. Finally, an important element within a big data architecture is the governance of big data that pertains to all layer or stages in the architecture and refers to the overall management of big data, regulating aspects such as accessibility, availability, and security of data. In summary, big data is one of the most important and promising technologies in digital business and serves companies to analyze their data and to gain valuable insights that contribute to maintaining their competitiveness. AI is closely linked to big data, as both stand for key technologies in digital business. On the one hand, AI supports the preparation, processing, and analysis of datasets within the framework of big data and can thus contribute to uncovering fundamental structures in the data. On the other hand, AI itself requires technologies that are capable of processing very large amounts of data and is therefore relying on big data analytics. Accordingly, big data plays an essential role in the learning and performance of AI and has contributed significantly to the great breakthrough of AI in recent years. The more data AI has at its disposal, the better its analysis and learning progress. Due to the outstanding importance of new technologies in the context of big data and digital business, new and modified business strategies are emerging. Therefore, the following section will focus on new business approaches, such as digital platforms, sharing economy, or crowd strategies.

7.3

Cloud Computing

Cloud computing has experienced a significant increase in importance in recent years. It allows a decentralization of computing and storage capacities and a far-reaching application and networking of smart devices. Cloud computing thus plays a central role in digital business. Therefore, this section addresses the topic of cloud computing. Besides the infrastructural basis, analytical progress is also of considerable importance in this context.

Location Independency, Scalability, and Elasticity Cloud computing refers to the provision of servers, databases, software, network components, and storage via the Internet. Cloud computing represents an essential technological basis for digital business, since the decentralized and demand-oriented provision of servers, databases, or software for digital business is often crucial in terms of success. The various components of cloud computing are usually provided by external cloud service providers such as Amazon Web Services (AWS), IBM,

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253

SAP, or Microsoft but also smaller companies. Microsoft, for example, offers with its cloud platform Windows Azure a variety of different products and services in the cloud segment (Microsoft 2020). A cloud delivery model transforms investment (such as server purchases) into operational expenses, thereby lowering barriers to entry. This is due to the fact that the infrastructure is typically provided by a third party and does not need to be purchased for one-time or infrequent, intensive computing tasks. The pricing of utility computing is often based on usage-based billing options. The implementation of projects with cloud computing also requires less internal IT knowledge, since the company’s own server infrastructure can be partially replaced by external server services. Device and location independency allow users to access systems via a web browser, regardless of their location and the device they use (e.g., PC or mobile phone). As the off-site infrastructure (typically provided by a third party) is accessible via the Internet, users can connect to it from any location. Maintenance of cloud computing applications is more convenient because there is no need to install them on each user’s computer, and they can be accessed from different locations (e.g., from different workstations, while traveling, etc.). Off-premises software is generally referred to as “software as a service” (“SaaS”) or “cloud software.” This is different from on-premises software (sometimes referred to as “shrink-wrap” software), which runs on computers on a persons or organizations premises and is therefore managed locally (Godse and Mulik 2009; Boillat and Legner 2013; Winkler and Brown 2013). Off-premises software enables the sharing of resources and costs across a large pool of users through multi-client capability. The centralization of the infrastructure at locations with low costs plays a relevant role here. In this way, for example, electricity or building costs for necessary infrastructure elements can be minimized. In addition, the aim is to increase peak load capacity. As a result, users do not have to plan and provide their own resources and equipment. This aspect also leads to increased resource utilization and lower costs for users, since they do not have to invest in materials and equipment. Thus, especially the utilization and the increase of efficiency of systems are seen as relevant points (Metzger et al. 2011). The performance of the clouds is monitored by the service provider’s IT experts, so consistent and loosely coupled architectures are set up using web services as a system interface. Productivity can be increased by having multiple users working on the same data at the same time, instead of spending time storing data and sending it via email. This saves time, as the cloud no longer requires information to be re-entered into fields or synchronized. Similarly, users do not need to install additional application software upgrades on their computers. Multiple redundant sites ensure increased system reliability. This speaks for well thought-out cloud computing for business continuity and disaster recovery. Accordingly, the extent of a local disaster can be minimized. Scalability and elasticity through dynamic (“on-demand”) provision of resources is possible almost in real time without users having to schedule for peak loads,

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considering that the server startup time varies depending on server type, location, operating system, and cloud provider. This provides the ability to scale as usage needs increase or decrease when resources are unused. New approaches to elasticity management include the use of machine learning techniques that propose efficient elasticity models.

Security and Vendor Lock-In Security in cloud computing can be increased, for instance, through the centralization of data and strict security-oriented resources. While concerns remain about potential loss of control over sensitive data and the lack of security for stored kernels, security is as good as or even better than other traditional systems. Partly, this is due to the resources of service providers that are allocated to address security issues that many customers could not otherwise afford. However, some users lack the technical knowledge to cope with complex security requirements. This is due to the fact that data is usually distributed over several devices or used in multi-tenant systems to which different users have access. In addition, user access to security audit logs can be difficult or even impossible. Private cloud deployment is therefore partly motivated by users’ desire to remain in control of the infrastructure and avoid losing control of saved information. Besides the aspects of operational control, however, there is also the risk of increased dependence with regard to the freely selectable relationship between provider and user. In this context, the vendor lock-in problem in cloud computing describes the situation in which customers are dependent (i.e., locked in) on a single technology implementation of a cloud provider and cannot switch to another provider in the future without incurring significant costs, legal restrictions, or technical incompatibilities (Sitaram et al. 2012). To further substantiate this from a software developer’s point of view, the lock-in situation is that applications developed for certain cloud platforms (e.g., Amazon EC2, Microsoft Azure) cannot easily be migrated to other cloud platforms, and users become vulnerable to changes by their providers. In fact, the lock-in problem arises when, for example, a company decides to change cloud providers (or perhaps integrate services from different providers) but is unable to move applications or data across different cloud services because the semantics of cloud provider resources and services do not match. This heterogeneity of cloud semantics and cloud application program interfaces (APIs) creates technical incompatibility, which in turn leads to interoperability and portability problems. This makes interoperation, collaboration, portability, and manageability of data and services a very complex and elusive task. For these reasons, it becomes important from a business perspective to maintain flexibility, change providers according to business needs, or even keep internally some of the components that are less business critical due to security risks. Interoperability and portability between cloud vendors can avoid the problem of vendor lock-in and would significantly impact the competitiveness of the market.

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255

For example, cost savings, greater flexibility, a (local) distributor, and also mobile access to IT services or greater speed and scalability of IT services are cited. Basically, cloud computing distinguishes between four different forms of provision and three types of services. These delivery and service models are shown in Fig. 7.14 (content based on Chou 2010; Gosh 2013; Digital Technology 2017).

Public Cloud

Private Cloud

Hybrid Cloud

Community Cloud

Cloud Computing

Organizational IT Infrastructure

Infrastructure as a Service (IaaS)

Platform as a Service (PaaS)

Software as a Service (SaaS)

Application

Application

Application

Application

Data

Data

Data

Data

Runtime

Runtime

Runtime

Runtime

Middleware

Middleware

Middleware

Middleware

Operating System

Operating System

Operating System

Operating System

Virtualization

Virtualization

Virtualization

Virtualization

Server

Server

Server

Server

Storage

Storage

Storage

Storage

Network

Network

Network

Network

Security

Security

Security

Security

Customer Responsibility

Service Provider Responsibility

Fig. 7.14 Provision and service models of cloud computing. Source: Wirtz (2016b, 2020b)

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Three Types of Cloud Service Models In the case of the public cloud, a cloud service provider, such as Amazon or Microsoft, makes services and infrastructure available to the public against payment of a fee. An example is the public cloud Azure by Microsoft or Amazon’s AWS (Amazon Web Services). Here, the services and infrastructure are owned and managed by the cloud service provider (Perry and Hendrick 2013). Private cloud refers to a model of cloud computing in which IT services and infrastructure reside mostly in the own organization and are only used by the latter. Here, one can particularly customize important aspects of cybersecurity to the specific requirements of a company. A hybrid cloud usually represents a mixed form of public and private cloud. Most commonly, sensitive data reside in enterprises in the private cloud and other resources in the public cloud. As a result, there often exists a higher degree of IT flexibility with additional service options. In the case of the community cloud, multiple organizations operate and use the cloud resources. Here, only the community partners can access the cloud. Besides the different provision models of the cloud services, one can distinguish between three types of cloud service models. In Fig. 7.14, the left pillar “organizational IT infrastructure” describes the IT functions ranging from applications to security on premise, within a company’s own data center. The second pillar “infrastructure as a service (IaaS)” refers to a service model in which an external cloud service provider supplies the data center infrastructure (e.g., server, storage, and networks) against payment of a fee, while the supplied company manages the applications (Chou 2010; Gosh 2013; Digital Technology 2017). The third pillar represents “platform as a service (PaaS).” Here, a company obtains an even larger part of IT services from a cloud service provider and confines itself to application development. The last pillar in Fig. 7.14 is “software as a service (SaaS).” In this service model, a company purchases all IT services from a cloud service provider and only uses them. This brings along the highest degree of outsourcing and dependence, as the fewest IT services reside in the company. Cloud services are frequently used in combination with AI in the context of IoT. In this connection, AI will be become particularly important in the future.

7.4

Summary

• Artificial intelligence refers to the capability of a computer system to show human-like intelligent behavior. This behavior is characterized by core competencies like perception, understanding, action, and learning. • Three stages of artificial intelligence can be distinguished: narrow AI that is operating only in dedicated areas and specialized in repetitive tasks, general AI that can perform intellectual tasks with the same efficiency as humans and is thus operating in many areas, and super AI that is characterized by very fast selfimprovement and is superior to humans in all areas.

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257

• Due to its function as a cross-sectional technology, AI has a wide range of applications in all industries. The highest potential for AI automation is expected in production, in transportation and logistics, as well as in retail trade. • Besides its high economic potential, AI also involves social and ethical advantages, such as improved medical diagnostics and early detection of pandemics. • However, there are also economic and social risks associated with AI, such as impending job losses and a loss of control over technologically autonomous AI systems, as well as the threat of cyberattacks and insufficient data protection. • Against this background, governance of AI is essential. A helpful tool in this regard is the strategic four AI governance model, which takes into account social and ethical, legal and regulatory, business and economic, and technological and implementation-oriented risks. Based on this, a strategic AI governance agenda can be developed. • Big data represents an essential basis for digital business as it allows for intelligent and systematic analysis and evaluation of data information. Thereby, big data application is far superior to the traditional relational database systems in terms of data velocity, data volume, and data variety. • The big data architecture consists of seven layers: (1) data sources, (2) data content format, (3) data type, (4) data acquisition, (5) data management, (6) data analytics, and (7) data visualization. Another important element is the management of large data, which relates to all seven layers of the architecture and covers general management and regulatory aspects such as accessibility, availability, and security of data. • Cloud computing refers to the provision of servers, databases, software, network components, and storage via the Internet and represents another essential technological basis for digital business. Advantages of cloud computing are, for example, device and location independency, greater speed and scalability of IT services, as well as cost savings. • Cloud computing can be distinguished into four forms of provision and three types of services. Infrastructure as a service (IaaS) is characterized by the fact that an external service provider only provides the infrastructure of the data center. Platform as a service (PaaS) is characterized by a higher degree of perceived services provided by an external service provider. Finally, software as a service (SaaS) is based exclusively on services provided by an external service provider.

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7 Artificial Intelligence, Big Data, and Cloud Computing

Chapter 7 Questions and topics for discussion

Review questions 1. Present the different stages and functionalities of AI. 2. Explain the AI framework. 3. Describe AI application areas and give examples of AI use cases. 4. Explain the seven layers of a big data architecture and which aspects are addressed by big data governance in this context. 5. Describe the different types of provision and service models of cloud computing and explain differences in terms of the organizational IT infrastructure.

Topics for classroom discussion and team debates

1. In a not too distant future, there will be AI machines that are superior to human work in many areas and will replace it to a large extent. Discuss the ethical aspects of such a situation and in particular the impact on the labor market and possible mass unemployment. 2. Discuss on the basis of the levels of AI-based governance how socially desirable it is to have AI machines control humans. 3. Discuss the opportunities and risks of cloud services in class. Are the risks reasonable in relation to the advantages of cloud services?

8

Digital Platforms, Sharing Economy, and Crowd Strategies

Contents 8.1 Basics of Platform Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Platform Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advantages of Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Platform Functionality and Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Sharing Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareconomy and Sharing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SSU Sharing Platform Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Applications of the Shareconomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 Crowd Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Crowdfunding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Crowd Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

260 260 262 268 269 269 271 273 275 275 278 278 279

Learning Objectives By working through this chapter, you will be able to: 1. 2. 3. 4. 5.

Describe the key elements of a platform environment. Explain the advantages of platform business models for suppliers and consumers. Illustrate the interactions on a platform environment. Describe the SSU sharing platform model. Explain different crowd strategies and their customer benefits.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_8

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The platform business model has gained significant importance in the context of digital business. A digital platform provides the infrastructure, the framework conditions, and the rules for an online marketplace where producers and consumers have the opportunity to interact and exchange goods and services (van Alstyne et al. 2016). The following section outlines the basics of platform economics. Section 8.2 describes the sharing economy, explaining strategies and applications of the sharing economy. Finally, Section 8.3 deals with crowd strategies, focusing on crowdfunding, crowd investing, and social trading.1

8.1

Basics of Platform Economics

In the course of digitization and the widespread use of mobile devices, service provision for users has also changed. Meanwhile, online marketplaces and in particular platform models such as Airbnb or eBay have gained outstanding importance.

Platform Components Figure 8.1 depicts a platform consisting of four components. Each of the components is subdivided and enhanced with examples (content based on Parker et al. 2016). The functional level illustrates the basic benefits of operating a platform, whereby a distinction can be made between different functions, such as acting as an intermediary, pooling, or profiling. While the former represents the classic case of platform operation and aims at bringing two parties together, pooling describes the aggregation of specific resources. Here, the platform serves as a collector. Profiling, by contrast, pursues the goal of collecting and evaluating specific information regarding a certain object or an individual. This refers, for instance, to the analysis of behavioral patterns or certain recurring characteristics These functions can be carried out via a central marketplace (e.g., online trading) or through so-called matchmaking (e.g., dating platforms). Besides the wide reach, matchmaking particularly improves user orientation by providing personalized information. Another example is data analysis, where collected data is used for adjustments, for instance, for dynamic user interfaces. These dynamic UIs are created regardless of their place of origin and enable a multitasking environment. Furthermore, data-driven business models are also emerging in the context of data analysis. Collected customer, measurement, or analytical data is used for the modeling or adaptation of business models (Trabucchi and Buganza 2019). Beyond these functions, platforms also offer further advantages. In particular, with regard to distribution and logistics, digital platforms now provide services to their users. Accordingly, many platform operators offer more and more services that

1

See for the following chapter also Wirtz (2020b).

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261

Platform

Interfaces

Functional level

Intermediation Central marketplace and matchmaking • User orientation through personalization • Large operating range •…

Economic advantages

Profiling Distribution and logistics

Data analysis • Data-based adjustment according to market situation • Dynamic UIs • Data-driven BMs •…

• • • •

Distribution Logistics services Supplier services …

Mobile applications

Websites

Programs

Third-party integration

Economies of scope

Network effects

…

Payment transaction

…

• Payment channels • Operational management • Authorization • Security •…

•…

Market access Suppliers

Market access Customers

Shops/offices

Revenue model

Pooling

…

Supplier websites Service points

Platform programs

Third-party integration

…

High data volume for big data analysis/machine learning

Economies of scale Long-tail markets serving niche markets

ERP interfaces

Lock-in effects strategic barriers to change

…

Fees and commissions

Consulting/ services

Sale of user data

Advertising

Cross-selling

Premium models

Private labels/products

…

User Base Customer

Consumer

Supplier

Customer

Supplier

Customer

Producer

…

Prosumer

Fig. 8.1 Key elements of a platform environment. Source: Wirtz (2020b)

have previously been carried out by users, companies, or sellers themselves. An important aspect is to ensure that payment transactions are processed correctly and to ascertain correct personal information on the platforms. Consequently, platforms also perform these functions, thus helping to achieve a certain level of guarantee regarding secure payment transactions and personal data. The second platform component in Fig. 8.1 deals with the aspect of interfaces. Here, a distinction is made between customer-sided and supply-sided market access. Customer-sided market access can be achieved in different ways and is not based on any specific process or access procedure. Accordingly, customers can access a platform by means of a website and various programs or via mobile applications. Supplier-sided market access can take place through websites, ERP interfaces, or a variety of service points.

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Advantages of Platforms The use of platforms enables to achieve various synergies and realize many advantages. On the one hand, platforms with their continuous data collection offer a very large volume of evaluable datasets that enable big data analyses and thus pave the way for future machine learning. On the other hand, particularly niche products can be sold much more successfully by means of a platform. This is due to comparatively low costs with an increasing number of potential customers. Consequently, the economic advantage of platforms is also particularly true for long-tail markets, which would otherwise have difficulties in reaching enough customers for their niche products. Other economic advantages resulting from platforms include economies of scope, economies of scale, and lock-in effects. Although platforms have been around for some time (e.g., shopping centers, wholesale market halls, etc.), the associated network effects and economies of scale can only be exploited more intensely with the increasing importance of the Internet. Modern information and communication technologies have facilitated the development and use of online platforms. At the same time, cloud technologies have significantly reduced associated costs, mainly due to their scalability. These economies of scale can have various triggers ranging from increasing automation to learning curve effects. In this context, the economic advantage is achieved due to a reduction in unit costs. Furthermore, the online networking of millions of people also allows platform operators like Amazon to participate in a large number of transactions without having to buy or stock the goods themselves. In contrast to traditional companies, where an increasing number of customers usually lead to higher costs and whose transactions are characterized by comparatively high variable costs, platforms are a business model with very low variable costs. As the number of users increases, the value of the platform generally also increases. Economies of scope occur, for instance, if synergies are created with regard to the cost structure. Amazon is also improving its long-tail position with additional offers. The so-called long tail describes a business phenomenon in the digital world. While companies previously generated the majority of their sales with A-products, the bestsellers (products that are in most demand), platform operators, and companies offering digital products often generate the majority of their sales with niche products. The lock-in effect, on the contrary, is particularly advantageous for the platform provider, as it leads to increased customer loyalty. Due to switching costs, customers usually remain with one supplier, although another supplier may offer a better product. However, switching costs, such as the loss of personalized settings, renewed search costs, or missing compatibility of programs, constitute high barriers that prevent customers from switching (Basaure et al. 2020). Moreover, especially in connection with platforms, positive network effects can be achieved. This means, the perceived customer benefit increases with a growing number of users and a greater reach of the platform. The fourth component of a platform deals with the underlying revenue model. In order to secure the operation of a platform in the long term, a profitable revenue

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model is necessary, which can be set up very differently. For instance, some platforms charge fees and commissions for use. Another revenue model is based on free platform access in exchange for user data. The collected data is then used for trade and thus monetized. Other platforms generate their revenues through advertising, which they display and spread on the platform. Further revenue models include cross-selling or premium models. These involve selling a product with additional related products, or, in the case of premium models, users can buy a privileged position, for instance, by paying an additional financial amount. A platform’s specific characteristics with regard to the four components are determined by the influence of the user base. The user base traditionally consists of consumers and producers of a product. However, an increasing number of e-commerce websites such as Airbnb and Uber or online encyclopedias indicate a change regarding the traditional separation of producers and consumers, according to which both parties are merged into so-called “prosumers.” As a result, these prosumers act on platforms as producers or suppliers, for instance, by making their apartments available for short-term rent or by writing encyclopedia articles. However, they also take on the role of consumers or users, by benefitting not only from the opportunity of renting accommodation via the platform but also from other users’ encyclopedia entries. The extent to which the various components of a platform fit together and which function or revenue models are pursued is influenced by both suppliers and customers. As a result, platforms change in the course of their operation and are adapting to new circumstances. Figure 8.2 illustrates the interactions and the concrete advantages of platforms on the customer and supplier side. It becomes clear that platforms often act as gatekeepers, since they hold a key position as a central control, monitoring and selection authority for the exchange between suppliers and customers. As shown in Fig. 8.2, three areas can be distinguished. The first area represents the platform as such, which forms the interface between demand and supply. Hence, the platform provides various services for both the demand side and the supply side. These services include the processing of payment transactions, the possibility of data exchange, the provision of a logistics infrastructure, as well as the creation of preference profiles and product reviews. In this way, the platform performs functions regarding the monitoring and selection of the process of exchanging goods and services in an online marketplace. Both the demand and the supply sides finance the platform mostly through flat-rate or usage-based fees. Sales platforms such as Amazon or eBay, for example, only charge a commission on the supplier side after concluding a sale, as well as a monthly basic fee for commercial users. In addition, many platform providers use their prominent position as a central marketplace to offer corresponding web services. On the buyer’s side, usually no fee is charged, unless customers opt in for premium services or streaming services, which are often paid by monthly flat rates. Payment processing is usually carried out via the platform itself, with other payment service providers such as PayPal or Skrill often being included in the transaction. The same applies to logistics and distribution services. They are often performed by the platform providers themselves or at least facilitated by them.

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Market Demand

Supply Fees Payments Service provision

Fees/commissions Payment processing Distribution/logistics

Payments Deliveries

Data exchange and feedback

Buyers/users who buy the products and services on the platform

Manufacturer/supplier of the products and services offered on the platform

Product reviews Preference profiles

Central access to a wide variety of products/services Price/performance Customer service

Platform services Monitoring and selection (Content, suppliers, participants etc.)

Central access to large sales markets

Platform

Central sales program

Interfaces Presence/awareness Personalization/user orientation Niches, special interest

Services (shipping, stores, payment, etc.)

Customer data analysis

Maximization of revenues induced by positioning as central market place

Traffic Data

High user orientation by means of big data and artificial intelligence based on purchase and customer data

Presentation area and marketing tool Payment processing and analysis Traffic Data

Decentralized accessibility at any time

Additional services (shipping, IT, standards)

Fig. 8.2 Interactions on a platform environment. Source: Wirtz (2020b)

Communication is usually kept within the respective platform environment, so that customers and providers only need one central point to do business and process transactions. The platform as a digital marketplace also enables the transmission of feedback and data exchange between customer and seller, for instance, in the event of inadequate service provision. When making purchasing decisions on platforms, buyers increasingly follow product reviews of previous buyers and their assessment of the quality and priceperformance ratio of the selected goods. Amazon, for example, uses a five-star ranking, which, depending on the product, has further subcategories for evaluating individual features. The various customer reviews are collected and displayed in a simple representation on the product page by means of filled stars, thus providing potential buyers with orientation and decision support regarding their own purchases. These reviews are based on verified purchases made on the platform and can also include images of the goods, besides a written review. In addition, the data collected on the platform and their analysis are used to create differentiated data profiles in order to determine specific consumption and preference profiles. On the one hand, this data analysis serves to support customers in their

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product search through targeted and adapted product suggestions. On the other hand, suppliers can use the analysis to optimize their own products or services with regard to existing demand and thus increase their own economic success. Table 8.1 shows a comparison of four platform providers, illustrating differences and similarities based on four categories. The categories serve to simplify the presentation of the platform idea but also to explain the economic success of the respective platform. As modern online marketplaces, platforms offer the possibility to trade a wide variety of products and use different strategies depending on the sector to which they belong, thus conveying different value propositions. In addition, platforms differ with regard to the way in which integration functions, as well as regarding possible economies of scale and economies of scope. In this context, Table 8.1 provides a comparison of the four platform providers Uber, Airbnb, Amazon, and eBay. Their value propositions are divided into a supplier and a user perspective. This distinction is due to the gatekeeper property of the platforms and breaks down the different advantages for suppliers and customers. On the one hand, Uber as a driving service agent promises its suppliers the opportunity of generating further earnings in addition to their existing income by using their otherwise unused private vehicle as a taxi themselves. The necessary registration on the website is easy, and the lack of fixed working hours and supervisors gives suppliers the possibility of an independent source of income that they can use flexibly. Users of this service, on the other hand, have the opportunity to enjoy a service equivalent to that of traditional taxis at significantly lower prices. Via an app, a vehicle can be called to an individual pickup location and destination at any time without a long wait. Airbnb conveys a similar value proposition to its suppliers by promising additional income through the rental of private unused space. Via the platform, suppliers can offer individual rooms on a daily basis, as well as entire apartments or houses for several weeks. In addition to the intermediation by Airbnb, the platform also provides suppliers with insurance coverage in the event of damage caused by the rental of the accommodation. Moreover, the supplier is free to choose the duration and number of rental days and can cancel at short notice and flexibly for own requirements. Users of the Airbnb platform benefit from individual and usually fully equipped apartments at low prices, especially compared to hotels. In addition, both hosts and users can rate the other side via the Airbnb platform. Here, hosts can focus on the behavior and handling of the accommodation provided, and users can rate the cleanliness and quality of the accommodation as well as the accuracy of the information provided. By contrast, the platforms of Amazon and eBay promise their sellers a different value proposition. Both platforms ensure a wide reach in terms of their areas of activity and can be used continuously to offer and sell own goods or services. Accordingly, both platforms enable customer acquisition regardless of location and thus increase the potential sales market of their sellers. Besides this, the

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Table 8.1 Comparison of platform providers Value Proposition

Uber Supplier • Opportunity to generate additional income • No immediate superior • Set flexible driving times themselves • Easy participation/ registration as a driver • ... User • Exact pickup and destination locations • Low waiting times • Available at any time/mobile availability • Comparatively cheap (in contrast to taxi costs) • ...

Functionality of Integration

• Intermediation of individual private driving services via an app within a digital network • Increasing the capacity utilization of vehicles • ...

Airbnb Supplier • Opportunity to generate additional rental income • Insurance protection through booking via the platform • Flexible and short-term commitments and cancellations for own requirements • ... User • Lower costs than a hotel • Mostly fullequipped apartments • Authentic and individual accommodation • Transparent evaluation system • ...

• Intermediation of private and authentic accommodations worldwide (room, apartment, house, etc.) • Sharing economy for better utilization of living space, since 2018 complemented by the integration of classic hotel industry • ...

Amazon Supplier • Wide reach • Large number of customers (independent of location and time) • Numerous additional service offers (logistics, payments, etc.) • ...

User • Comparatively low prices • Short waiting times, fast delivery • Available at any time/mobile availability (1-Click buying) • Large number of products, plenty of choice • ... • Digital marketplace with a wide variety of products including streaming services for video and music • ...

eBay Supplier • Wide reach • Large number of customers (independent of location and time) • Numerous additional service offers (logistics, payments, etc.) • ... User • Available at any time/ mobile availability • Different purchase options (bid, immediate purchase) • Large number of products, plenty of choice • ... • Digital marketplace and auction house with a large variety of products • ...

(continued)

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Table 8.1 (continued) Strategies

Economies of Scale/ Economies of Scope

Uber • Entrepreneurial exploitation of individual passenger transport by private vehicles and available manpower • Establishment of a global and central brand in the transport sector • Digital and technological market leadership • ...

Airbnb • Use of private housing as a resource in tourism and for business travelers • Central and global brand for short-term rentals • ...

• Economies of scale from using private cars as a fleet • Digital platform that can be used globally • Collection of substantial datasets for subsequent offer optimization • ...

• Economies of scale from using private living space as rental space • Digital platform that can be used globally • Collection of substantial datasets and evaluation of individual rental objects for subsequent offer optimization • ...

Source: Wirtz (2020b)

Amazon • Positioning as primary search engine and seller • Global and central retail brand • Digital and technological innovation driver • Inexpensive/ free entry offers for customers • Financial success when considering the total lifetime value of a user • ... • Considerable number of users enables economies of scale in logistics, IT, and management • Analysis of large amounts of data enables optimization of search engines and advertising • Provision of warehouse and logistics infrastructure for sellers • Digital platform that can be used globally • Wide variety of products increases switching costs for customers (e.g., Amazon Prime, Amazon Video, Amazon Music, etc.) • ...

eBay • Online marketplace for retail customers and business and private sellers • Full-service provider • ...

• Digital platform that can be used globally • Analysis of large amounts of data enables optimization of advertising • Considerable number of users enables economies of scale in IT and management • ...

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platforms offer numerous additional services to their suppliers, for example, in terms of logistics or services. In this context, users benefit from a large number of different products and sellers. They can also compare products quickly and easily at any time and order them immediately. Under these conditions, Amazon also offers its customers 1-Click ordering. Here, all necessary data for a chargeable transaction are already stored. In addition to the Buy It Now (BIN) option, eBay also offers an online auction, where the seller determines duration and starting price.

Platform Functionality and Strategies An examination of the four platforms with regard to the functionality of the integration reveals differences. For instance, Uber focuses on the intermediation of individual journeys via the Uber app in order to achieve an increase in capacity utilization of vehicles. Likewise, Airbnb aims to improve the occupancy rate and utilization of unused living space by the intermediation of unused private living space, especially in large cities. Furthermore, Airbnb has also opened its platform to the traditional hotel industry since 2018. On the contrary, Amazon presents itself as a digital marketplace that can satisfy almost all consumer wishes with its considerable product diversity. Besides the classic sale and shipping of goods, video streaming and music streaming services are now also part of their service portfolio. Likewise, eBay positions itself as a digital marketplace and auction house that offers its customers a wide variety of products. In view of the increasing relevance and success of these platform providers, the individual underlying strategies are examined in the following. In this regard, Uber aspires to establish a global and central brand in the transport sector, aiming to become the digital and technological market leader. This is achieved by the entrepreneurial exploitation of unused private vehicles for the provision of individual passenger transport. Airbnb also positions itself as a central and global brand, but in the short-term residential rental sector. Amazon, again, pursues its positioning as a global and central retail brand, with digital progress and technological innovations being important components of their strategy. The aim is to position itself as a primary search engine and marketplace for customers. The online marketplace eBay pursues a similar strategy by offering a wide range of products for both business and private customers. Hence, it has already established itself as a global brand. National and international successes are supported not only by the underlying ideas of the respective platforms but also by economies of scale and scope. Uber, for example, benefits from the use of private cars as passenger transport vehicles and thus does not have to provide its own fleet of vehicles. In addition, the data collected via the app serves to improve its offers. Likewise, Airbnb uses the datasets generated by its platform to optimize its own offers and to constantly adapt them to new customer requirements. In addition, the platform also benefits from the provision of private rental rooms, which means these do not have to be provided by Airbnb, thus avoiding higher costs. Amazon also uses

8.2 Sharing Economy

269

data to adapt its offers. Moreover, Amazon generates economies of scale especially in the areas of logistics, IT, and management. The company also benefits from a global presence and the considerable product variety it can offer to customers. The more products and services are transacted via their own platform and a personalized account, the less likely it is that users will switch to a competitor. Likewise, eBay benefits from its worldwide presence and the wide variety of products in connection with the additional services it can offer to sellers. Amazon represents a central online marketplace for both buyers and third-party sellers. Both the company’s own products and the services offered to merchants have increased considerably in diversity since the company was founded.

8.2

Sharing Economy

The communication and coordination costs for the distribution of goods, among other things, have decreased significantly in the course of digitization. In addition, trends such as urbanization, increasing mobility, and growing environmental awareness contribute to the emergence of new forms of consumption and investment that put excessive consumption and accumulation of property up for discussion (Botsman and Rogers 2011). Against this background, Internet-based platforms have developed that enable the organization and marketing of a cooperative use of various resources. In this context, the so-called sharing economy or shareconomy has emerged as a term that describes the concept of cooperative use of resources. It refers in particular to business models relating to the procurement, communication, marketing, and eventually the transfer of rights to use resources. In contrast to the traditional purchase and subsequent exclusive use of a resource, such as a car or a drill, a sharing approach is based on the often short-term rental or utilization and subsequent return or further transmission.

Shareconomy and Sharing Strategies The shareconomy, also known as share economy or sharing economy, was coined as a term especially by the work of Lawrence Lessig (2009) who analyzed the aspect of sharing values and competencies in the Internet economy. Sharing is mainly related to cooperation, coordination, and shared responsibility on the Internet, and, for example, collaboration on Wikipedia or the sale of used items on eBay is also seen as part of the share economy. In a narrower sense, shareconomy is about the shared use of resources, usually organized through online platforms (Hawlitschek et al. 2018). Providers that are assigned to the shareconomy often follow rental or leasing models, as they have been practiced for centuries (Jones and Zeitlin 2010). The innovative component of the shareconomy refers in particular to the online-based platforms that enables fragmented and more entertaining distribution of resources.

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The transfer of usage claims involves transaction costs, such as search costs to find a suitable offer or buyer; costs of physical transfer of goods or values, such as transport or relocation costs; as well as insurances for the maintenance and careful handling of the consumer goods, etc. These costs can be significantly reduced by standardized contracts and platform business models by means of the Internet. Search costs can be reduced, for example, by open platforms that enable efficient information exchange and direct competition between available resources. Moreover, the use of standard contracts such as general terms and conditions of business can achieve major economies of scale, which significantly reduce costs for providers and users. Due to this central integration of users and providers, the shareconomy is also referred to as access economy, peer-to-peer (P2P) economy, or collaborative economy. According to a study by PricewaterhouseCoopers that examined five shareconomy areas, including travel, car sharing, finance, human resources, and streaming, the total global spending in 2014 was around 15 billion USD. This represented only about 5% of the total spending in these areas. The PwC report predicts that spending on sharing services will rise to 335 billion USD until 2025, representing about 50% of the total spending in these five areas (PricewaterhouseCoopers 2014b, 2015). A study commissioned by the European Commission found that the volume of P2P transactions in the EU in the five sectors sales of goods, rental of apartments, goods sharing, casual jobs, and carpooling amounted to 27.9 billion EUR in 2015, accounting for less than 2% of the total turnover. At the same time, the study points out the high growth rates and the potential of the shareconomy (European Commission 2017). The exchange of resources in the context of the shareconomy is particularly relevant in the areas of real estate, mobility, everyday objects, and labor or services. Especially durables, consumer goods that are characterized by a long shelf life and are not consumed or are only used up due to long-term wear, are particularly suitable for a short-term transfer of rights of use. In the context of the shareconomy, it is important to differentiate between the terms property and possession, which are often used synonymously in colloquial language, although formally and especially legally they do not represent the same facts. The term possession merely describes the control over a thing. So it is enough to have a thing to call it your possession. Thus, in a legal sense, rented or even stolen property is to be called possession. Conversely, property can only describe a thing for which a person holds the property rights and thus has the ownership. It is crucial that it is legally recognized that there is not only full and complete right of dominion but also power of disposal. However, it is possible for an owner to grant rights over the property to someone else, for instance, through rental so that the owner may be unable to use the property himself. Both terms are important for sharing, as more and more often possessors and owners are not the same persons. In the shareconomy, there are two approaches to determine who owns the resource pool. Either a company takes over the role of the owner and distributes resources efficiently and for a short time to different users. This is the approach taken by bike-sharing providers such as Hangzhou Public Bicycle in China and Vélib’ in France and car-sharing providers such as Yandex.

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Drive in Russia and Share Now in Germany, as well as co-working providers such as WeWork, which operates globally. Or alternatively, the resource pool remains the property of the crowd with the shareconomy provider organizing the placement by himself. This approach is taken by short rentals provider Airbnb, driving service Uber, and neighborhood rental services Streetbank or Peerby. Figure 8.3 summarizes the main features of the terms ownership and possession.

Possession

Ownership

Characteristics

• Actual control of a thing

• Legal dominion of a thing

• Access to a thing to enjoy and dispose

• Based on property rights

• Rented (and stolen) things are being possessed

• Complete right of dominion, i.e. absolute power to enjoy and dispose

•…

• Right of disposal can be granted to someone else, e.g. rental •…

Examples

• By renting a vehicle it becomes the possession of the renter

• After buying a vehicle one becomes the owner

• Since the vehicle has not been bought, it is not the property of the renter

• By renting, the power of disposal is only temporarily transferred to the renter

• The right to use the vehicle is obtained through the rental • E.g. car rental with Yandex.Drive or Share Now

• E.g. vehicle purchase from BMW or Volkswagen •…

•…

Fig. 8.3 Summary of the terms possession and ownership in the shareconomy. Source: Wirtz (2020b)

SSU Sharing Platform Model Sharing platforms differ in their formats. Often their digital formats in terms of websites, programs, and mobile applications have great importance. Principally, some providers also offer operation via e-kiosks or telephone services, for example. The services offered by sharing platforms range from information provision to big data analysis. In terms of functionality, the intermediation between sharing resource suppliers and users is particularly noteworthy. Furthermore, an essential functionality of a sharing platform is the pooling of available resources. In addition, it is important to identify and evaluate the resource providers and platform users in order to create trust. Revenue models of sharing platforms can range from conventional fees and transaction commissions to donations. Figure 8.4 shows the role of a sharing platform as an intermediary between the resource pool and the user as a so-called

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Sharing resources

Property of platform users on the supplier side

Property of platform provider

Mobility

Real estate

Everyday objects

Labor force

…

Car

Room

Clothes

Web designer

…

Bicycle

Apartment

Tools

Photographe r

…

E-scooter

House

Games/book s

Copywriter

…

…

…

…

…

…

Sharing platform Platform formats

Sharing platform service

Functionality

Website

Mobile

Service desks

Information service

Matchmaking service

Payment service

Cross-selling services

Modular services

Customization/ location services

Insurance

Guarantee of use

Telephone/ on-site service

Reviews/ trustworthiness

Big data/ AI analyses

…

Intermediation

Pooling

Profiling

…

…

Fees and commissions

Advertisement

Sale of user data

Cross-selling

Donations

…

Revenue model

Platform users Private

Business

Public

Fig. 8.4 SSU sharing platform model. Source: Wirtz (2020b)

Other institutions

8.2 Sharing Economy

273

SSU sharing platform model. The term SSU stands for sharing resources, the sharing platform, and the users of the platform.

Applications of the Shareconomy Against the background of the sharing platform model, a variety of applications can be distinguished in the shareconomy. Table 8.2 shows applications in the shareconomy for the areas of real estate, mobility, everyday objects, and services with regard to their applications, customer benefits, and practical examples. Table 8.2 Applications of the shareconomy Sector Real Estate

Applications • Short-term rental of real estate • Accommodation places as exchange offers • ...

• Short-term rental • Sharing of workplaces • ...

Mobility

• Driving service agency/rental incl. driver in private cars • ...

• Bike-sharing/short-term rental of bicycles • ... • Car-sharing/short-term rental of vehicles • ... Everyday Objects

• Short-term rental and sharing of home appliances • ...

Customer Benefits • High flexibility • Comparatively inexpensive • No term of contract • No capital commitment • ... • High flexibility • Working atmosphere and equipment • No term of contract • No capital commitment • ... • Comparatively inexpensive • Elimination of fixed costs • High availability • ... • High flexibility • Modular mobility • No effort and costs for maintenance • ... • No term of contract • No capital commitment • ... • No capital commitment • No effort and costs for maintenance • Sustainability

Examples • Airbnb • Couchsurfing • ...

• WeWork • betahaus • ...

• Uber • Free Now • ...

• Hangzhou Public Bicycle • Vélib’ • ... • Zipcar • Share Now • WeShare • ... • Streetbank • Peerby • TradeMade • ... (continued)

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Table 8.2 (continued) Sector

Applications

• Exchange clothes • ...

• Exchange and sale of used books and films • ...

• Rental of toys • ...

Labor Force/ Services

• Platforms for booking project staff and freelancers • ... • Booking of journalistic services • ...

• Short-term booking of IT and design services

Source: Wirtz (2020b) and updates

Customer Benefits aspects • Social and societal motivation • ... • Great variety • Comparatively cheap • Sustainability aspects • Social and societal motivation • ... • Great variety • Comparatively cheap • Sustainability aspects • Social and societal motivation • ... • Great variety • Comparatively cheap • No maintenance costs • Sustainability aspects • Social and societal motivation • ... • High flexibility • Comparatively cheap • No term of contract • ... • High flexibility • Comparatively cheap • No term of contract • ... • High flexibility • Comparatively cheap • No term of contract • ...

Examples

• Swap.com • Swancy • Vinted • ...

• BookCrossing • BookSwap • Informal street book exchange • ...

• Toy Box Club • Toycycle • ...

• Fiverr • Upwork • Gulp • ... • JournalismJobs. com • All Freelance Writing • ... • Envato • DesignCrowd • ...

8.3 Crowd Strategies

275

Contrary to the shareconomy that deals with the provision of consumer goods or labor, crowd strategies are designed to channel resources from users into projects, initiatives, start-ups, or individuals. Here, online platforms play a decisive role as well, since they act as intermediaries bringing together both lenders and borrowers. However, many crowd strategies go far beyond the financing aspect and rather stand for an intensive involvement of the public in order to build new idealistic and economic values on the Internet. The following section addresses crowd strategies in more detail.

8.3

Crowd Strategies

The concept of crowdfunding is also based on Internet-based cooperation and coordination; however, in contrast to the shareconomy, it is not about the shortterm transfer of rights of use or the renting and leasing of resources, but about the development of initiatives, projects, or companies by involving the Internet community. It is often about finding start-up financing through donations or investments from online users.

Crowdfunding Crowdfunding is closely related to the concept of crowdsourcing that describes a model of procurement in which individuals or organizations provide goods and services, including ideas and finances, from a large and relatively open group of Internet users. The term “crowdsourcing” itself can be understood as a portmanteau of crowd and outsourcing, although it is often understood as a method of obtaining financing. Online financing via the crowd has grown considerably in recent years. According to the University of Cambridge’s Global Alternative Finance Market Benchmarking Report, the volume of funds raised via online platforms increased from 139 billion USD in 2015 to 305 billion USD in 2018 (Cambridge Centre for Alternative Finance 2020). In Canada, 7% of the financing volume of debt-based models in 2018 went to firms from the leisure and hospitality industry and further 6% to manufacturing and engineering industries, making them the largest industries utilizing debt-based crowd financing. Financing volume of debt-based crowdfunding accounted for 91% of total funds raised via online platforms in Canada in 2018. Equity models accounted for 7% of Canadian business finance, with 55% of these businesses operating in the technology (software) sector, 16% operating in finance, and further 11% operating in energy and mining (Cambridge Centre for Alternative Finance 2020). Worldwide, the transaction volume in the segment of private loans brokered online (P2P lending) has risen from 72.84 billion USD in 2017 to 78.92 billion USD in 2018 and is expected to reach around 99.24 billion EUR in 2024. Similarly,

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the number of loans has also increased. While the loans amounted to 24,500 in 2017, they increased by the amount of 1300 until 2018 and are expected to reach a total of 38,000 loans in 2024 (Statista 2020e). Crowdsourcing financing activities can be classified into four approaches: conventional and mostly idealistic crowdfunding; crowd investing, which is often yieldoriented; personal loans, which is usually referred to as P2P lending; and approaches of social trading, which covers investment decisions made by users of a social media community. Crowdfunding platforms are comparable to platforms that are part of the shareconomy. They act as intermediaries between lenders and borrowers. The ICB crowdfunding platform model in Fig. 8.5 presents investors, crowdfunding platforms and borrowers, as well as different aspects of crowdfunding. Conventional crowdfunding is a typically online-based financing approach for projects, initiatives, or start-ups, which aims at collecting small financial distributions from a large number of people in order to ultimately achieve a monetary goal. The most commonly used crowdfunding model is reward-based crowdfunding. In this model, people can support a project, campaign, or business idea by buying products or services in advance that are yet to be developed or by donating small amounts to enable the implementation of an idea. Although in some cases crowdfunding may serve to finance a company, the aim of crowdfunding is not to ensure the financial success of a company but rather to support the implementation of the plan described. Individuals and companies around the world present their project proposals by creating appropriate online profiles, typically including short videos about their projects and a list of rewards. The reasons why sponsors make a financial distribution are manifold. In this way, they can personally connect with the overall purpose of the campaign through a small financial contribution and thus, for instance, be part of an entrepreneurial community and support an innovative idea or product. At the same time, they can pre-acquire the rewards and thus be one of the first to introduce the new products or services to the public. This type of funding is particularly suitable for examining the market potential of ideas and, in some cases, for carrying out a kind of pre-marketing before larger investments are made. This process is also called reward-based crowdfunding and crowd sponsoring.

8.3 Crowd Strategies

277

Investor Private

Business

Other institutions

Public

Crowd financing platform

Type

Crowdfunding

Platform format

Sharing platform service

Functionality

Revenue model

Website

Crowd investing

P2P lending

Mobile

Social trading

Service desks

Information service

Matchmaking service

Reverse auctioning

Contingency insurance

Yield guarantee

Telephone/ on-site service

Reviews/ trustworthiness

Big data/ AI analyses

…

Intermediation

Pooling

Profiling

…

Fees and commissions

Advertisement

Sale of user and market data

Public funding

Donations

…

Borrower Private

Business

Public

Fig. 8.5 ICB crowdfunding platform model. Source: Wirtz (2020b)

…

Other institutions

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Crowd Investing Another form of support for new projects is crowd investing that is predominantly carried out by companies. This approach is also often called equity crowdfunding, as it relies in particular on the sponsors’ focus on return on investment. The key difference to crowdfunding is the equity character of the funding, according to which crowdfunding participants are promised a share of the profits if the project or the company is successful. Peer-to-peer lending or P2P lending is another crowdsourcing approach that focuses on arranging financing through a broad online audience. Since P2P lending platforms are generally operating exclusively online, they can operate at lower costs and offer their service more cost-effectively than traditional financial institutions, such as banks. Often P2P lending platforms can offer investors higher returns compared to conventional savings and investment products while offering borrowers money at lower interest rates. The P2P lending platform usually charges a fee for providing the matchmaking platform and for credit assessment of the borrower. Most P2P loans are unsecured personal loans, though amounts are also lent to companies. Some platforms offer the possibility to deposit luxury goods such as jewelry, watches, vintage cars, handicrafts, buildings, aircraft, and other business goods as security. The interest rates applied are usually determined based on an analysis of the platform. There are also platforms where borrowers compete for the lowest interest rate using the reverse auction model. On some platforms, the risk of bad debt is reduced by spreading investments across different borrowers. Other models are based on funds that lenders partially hedge in the event of default.

Social Trading The fourth type of crowdsourcing in the financing sector is social trading. This especially concerns copy trading or mirror trading, which rely on particularly successful traders in financial markets being copied by other traders on social trading platforms in their investment decisions. Table 8.3 presents application examples of finance-related crowdsourcing services.

8.4 Summary

279

Table 8.3 Categories and application examples of finance-related crowdsourcing services Crowdsourcing type Crowdfunding

Description • A mostly idealistic financial support of a project for a non-monetary report • ...

Crowd Investing

• A small financial investment in a project that is characterized by profit sharing • ...

P2P Lending (borrow and lend privately)

• An online-based personal loan method where there are no intermediaries besides the platform • ...

Social Trading

• Investment decisions are discussed and made in the Internet community (copy and mirror trading) • ...

Customer Benefits • Large public/ pre-marketing • Easy access to capital • Mobilization of stakeholders • Hardly any expenses • ... Large public/ pre-marketing • Easy access to capital • Access to investors • ... • Risk transformation • Lot size transformation • Cheap way to raise capital • Comparatively high returns • ... • Exchange of expertise • Cooperation based on skills • Performance compensation • ...

Examples • Kickstarter. com • Indiegogo. com • ...

• SeedInvest. com • Wefunder. com • MicroVentures. com • ... • LendingClub. com • Zopa.com • Bondora.com • ...

• eToro.com • Dukascopy. com • ...

Source: Wirtz (2020b) and updates

8.4

Summary

• The key elements of a platform can be illustrated by means of four main components. The first component is the functional level that comprises the basic benefits of a platform. Complementing levels are the interfaces of a platform, its economic advantages, and the platform’s revenue model.

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• The specific characteristics of a platform with regard to its four main components are determined by the influence of the user base, consisting of consumers and producers. Sometimes these two user groups merge into so-called prosumers. • Platforms offer various advantages, including the generation of a comprehensive database, enhanced opportunities for niche products, economies of scope and scale, as well as lock-in effects. • A platform’s lock-in effect is particularly advantageous for the platform provider, as it leads to increased customer loyalty due to high switching costs. • Interactions on a platform environment can be explained with regard to the platform as a marketplace with a high user orientation by means of big data and artificial intelligence, as well as a monitoring and selection process of content, suppliers, and participants. The platform is the link between demand and supply. • Usually, platforms also provide or facilitate further services, like the processing of payments or logistics and distribution services. Platform providers may differ in terms of value proposition, functionality of integration, strategies, and realization of economies of scale and scope. • Internet-based platforms enable the organization and marketing of a cooperative to use various resources, thus laying the groundwork for the so-called shareconomy. • Providers of the shareconomy often follow traditional rental or leasing models. However, by using online platforms, transaction costs, such as search costs to find a suitable offer, can be significantly reduced. • The SSU sharing platform model illustrates the relationship of the sharing resources, the sharing platform, and platform users. Sharing resources can be either property of platform users on the supplier side or property of the platform provider. In either case the sharing platform is the connecting tie between resources and users. • Platforms are also often used in the context of crowd strategies. Common crowd strategies are, for instance, crowdfunding, crowd investing, P2P lending, and social trading.

8.4 Summary

Chapter 8 Questions and topics for discussion

Review questions 1. Outline the core components of a platform environment and their interactions in the platform environment. 2. Present interactions on platform environments, especially demand and supply aspects. 3. Explain the SSU sharing platform model. 4. Describe sharing applications. 5. Present crowd platforms and their contents.

Topics for classroom discussion and team debates 1. Platforms such as Amazon, eBay or Airbnb hold dominant market positions. Are these dominant market positions good for our free society and market economy? Discuss! 2. Sharing platforms offer many possibilities and advantages. Discuss how sharing platforms can positively change our environmental awareness and social behavior in the future! 3. Discuss the advantages and disadvantages of crowd strategies. Discuss and debate whether crowdfunding and crowd investing are viable alternatives to the traditional investment business (of banks and financial service providers).

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Contents 9.1 Digital Ecosystem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Digital Ecosystem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Ecosystem Structure: Organizational Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . Procurement and Procurement Interactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Knowledge Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Value Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Value Capture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision Interactions and Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Ecosystem Technical Infrastructure: Operational Models . . . . . . . . . . . . . . . 9.2 Digital Disintermediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Role of Trade in the Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Internet and Its Potential for Disintermediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Opportunities and Risks of Disintermediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disintermediation Case Study: HelloFresh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Digital Disruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Structure of the Five-Level Model of Digital Disruption . . . . . . . . . . . . . . . . . . . The Role of the Disruptor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Entrepreneurial Strategies for Digital Disruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Disruption Case Study: Netflix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

284 284 288 289 289 289 290 290 290 291 292 292 293 295 296 297 299 299 303 307 308

Learning Objectives By working through this chapter, you will be able to: 1. 2. 3. 4. 5.

Define the term digital ecosystem. Describe the digital ecosystem framework and explain each of the five layers. Explain digital disintermediation using the value chain. Explain the opportunities and risks of digital disintermediation. Describe the structure of the five-level model of digital disruption.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_9

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A further catalyst for considerable changes in digital business represents the facilitations of inter-organizational cooperations and value constellations as well as the radical upheavals caused by new technologies or processes in the marketplace. These phenomena refer to the emergence of digital ecosystems, digital disintermediation, and digital disruption in digital business. Therefore, the following sections focus on these significant change and transformation processes.1 Section 9.1 serves the basic understanding of a digital ecosystem and describes it by means of a framework. Following this, Section 9.2 deals with aspects of digital disintermediation. Finally, Section 9.3 addresses digital disruption.

9.1

Digital Ecosystem

The digitization has brought about not only new technologies, business models, and ventures, it has also changed the entire business landscape. The term digital ecosystems describes the idea of an environment based on digital means.2 It is related to the concept of business ecosystems, which is a concept inspired by biology and ecology (Scaringella and Radziwon 2018) and outlines the accord of numerous businesses that “coevolve capabilities around a new innovation: they work cooperatively and competitively to support new products, satisfy customer needs, and eventually incorporate the next round of innovations” (Moore 1993, p. 76).

Definition of Digital Ecosystem Accordingly, in contrast to the traditional view of value chains, an ecosystem contains all actors affecting business processes even those outside of the linear value creation process (Clarysse et al. 2014; Iansiti and Levien 2004a). Thus, value creation loses its linearity (Moore 1996) and spreads in a network of interrelated organizations, which contribute their specific mechanisms to the realization of an overall purpose (Christensen and Rosenbloom 1995). The merging in a business ecosystem therefore enables value creation that none of the economic actors involved would achieve individually (Adner 2006). According to Moore (1993), participants of a digital ecosystem cooperate by collaboratively providing value to the customer. Consequently, there is exchange between the participants, which is of a collaborative and of competitive nature. Therefore, the various models might incorporate market structures and value chain components. An interaction layer assigns specific roles to the various parties and, ultimately, determines the activities of each stakeholder in terms of value creation and capture within a specific ecosystem.

1 2

See for the following chapter also Wirtz (2020b). See for the following ecosystem content also Wirtz and Mueller (2020).

9.1 Digital Ecosystem

285

Participation in ecosystems brings companies more innovative strength, access to new customers and markets, as well as sales growth. However, many companies find it difficult to define the strategic approach and goals for their specific role in an ecosystem, as these require, for instance, new ways of thinking and a better distribution of resources. Such steps help to develop products and services quickly and bring them successfully to market. A prerequisite for this is that within the ecosystem, both one’s own revenue model and customers, markets, and channels are clearly defined. For successful collaboration within the ecosystem, executives must fundamentally change the way they think and add the ecosystem perspective to their business perspective. They must allow their ecosystem partners to play to their strengths. There are various understandings of digital ecosystems. One refers to a proprietary platform environment with a high level of compatibility, which attracts a multitude of actors to build their business upon the platform environment. Apple is such an example. It builds an own digital ecosystem that attracts companies to create applications for the different products, such as iPhone, Apple Watch, iPad, etc. The other understanding refers to a macro-perspective that incorporates different actors that base their activities largely on digital means. It also includes various stakeholders of different backgrounds, such as the companies, consumers, NGOs, and the government. Such integrative understanding requires a standard definition of digital ecosystems. It refers to an inter-connected context of multiple digital actors, value chains, and business relationships, creating a dynamic complex and relational structure representative of all digital business transactions that are more productive and effective together than individually. Definition of Digital Ecosystem A digital ecosystem is an integrated framework of different digital actors, value chains, and business relationships that represent all digital business activities leading to a dynamic and complex relationship network that collaboratively creates value. In order to postulate and govern the essentials and their interrelationships, a complex ecosystem needs to be subdivided into “a number of related groups of organizations, or business domains” (Iansiti and Levien 2004a). The main socioeconomic interest groups, i.e., stakeholders, represent an essential subdivision of the ecosystem’s actors. In this sense, it is important to differentiate the activity and influence of stakeholders and create a structure without neglecting the overlapping nature of many of these spheres. Figure 9.1 presents respective sub-models within an entire digital ecosystem. The integrative consideration of the various elements of an ecosystem shows that a comprehensive approach includes the digital ecosystem structure (governance model, collaboration model, interaction, and services model) and the digital ecosystem technical operations (software infrastructure model, physical infrastructure model).

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Digital Ecosystem Digital Ecosystem Structure (Organizational Models)

Digital Ecosystem Sub-Models

Governance Model

Collaboration Model

Interaction and Services Model

Digital Ecosystem Technical Operations (Operational Models) Software Infrastructure Model

Physical Infrastructure Model

Fig. 9.1 Sub-models within a digital ecosystem

In order to structure the complex setup of digital ecosystems, it is important to model its features and interdependencies. Digital ecosystems can simply be differentiated according to their technical basis, which enables all operations, “the digital infrastructure technical operations,” and the organizational layers, “the digital ecosystem structure.” Organizational models determine the generation of knowledge stock, the function of collective learning mechanisms, as well as the efficiency and reliability of information transactions among research facilities, agencies, industry, and the users. Combining the sub-models to a well-based conceptual model requires a detailed insight into the scientific progress comparing the findings of prior approaches to ecosystems. Three layers define the digital ecosystem structure and thus address the area of organizational models. The governance model describes the regulatory context including law, conventions, subsidies and incentive schemes, etc. The collaboration model describes the collaboration between major stakeholder groups. The interaction and service model describes the complex process of value creation within a specific digital ecosystem. The technical foundation of digital ecosystems, “the digital infrastructure technical operations,” consists of two layers: the software infrastructure referring to all software-related aspects and the physical infrastructure referring to all hardware aspects. With the aim of describing those processes in more detail, Fig. 9.2 presents the various sub-models and their interdependencies as well as processes that define digital ecosystems.

9.1 Digital Ecosystem

287

Governance Model Relational Governance

Contractual Governance

Technological Governance

Collaboration Model Industry / Business Context

Institution (NGOs, Research, Education)

Users (Consumers, Citizens, Civil Society)

Interactions & Services Model

Procurement

Procurement Interactions Professional Expertise Specialist Knowledge

R&D Funds

Private/ commercial providers

R&D Results

General / Public Knowledge

Information / Data Delivery

Human Capital

Open Data

Data Input

Software Design

Data Acquisition

Data Analysis

Data Provision Data Presentation

OnDemand Provision

Software Design

Cloud/ Platform Design

Data Hosting

• Agencies • Social Facilities • Public Suppliers (Energy, IT, etc.) • Statistical Authorities •…

Data Storage / Platform Hosting Data Query / Platform Inclusion

Software Programming Data Usage/ Vending

Data Analysis

Raw Data Processing

Service Data Input

Expert Skills

Supervision

Services • Presentation • Distribution

Content Commerce Context

Public providers

Users

Products and Services

Value Creation Software Programming

Service Features

Connection …

Customer Interface

Information / Data Inclusion

Customers

Knowledge / Skills Data & Staff

Expert Skills

• ICT Companies • Cloud Providers • Platform Hosters • Sensor Developers • Commercial Grid Operators •…

Provision Interactions

Knowledge Creation

Data • Data Input • Data Exchange Fees

Services

Open Data

Public Organizations

Value Capture

ICT Provision

Private Organizations

Participation ICT Inclusion / Payment

ICT-Augmentation

Service Design

Creation / Co-Creation

Software Infrastructure Model Perception

Communication

Software capable of perceiving, recognizing, collecting, and exchanging information:

Software that merges, evaluates and processes the recorded data, and administers the results

• Visual Sensor Systems

Communication FrontEnd:

• Audible Sensor System • Tactile Sensor System

• Data Processors

• Scanners / Machine Logs

• Data Caches

Communication BackEnd: • Core/Inference Engines

Operation Software that plans and executes operations in the physical world based on the data input and the programming of the software in use: • Smart Decision Support (Decision makers) • Dashboard Builder (Developers) • Mobile and Web Apps (Users)

• Knowledge Database

• Communication Terminals • Databases

Physical Infrastructure Model (Hardware) Processed Data Flow / Device Steering

Internet / Network Infrastructure

Data Servers

Unprocessed Information / Data Flow

Fig. 9.2 Digital ecosystem framework

Endpoints / Connected Objects

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Digital Ecosystem Structure: Organizational Models As mentioned above, the governance model refers to the regulatory context of a digital ecosystem, which determines the governing of the ecosystem. It describes the control and regulation system in the sense of structures (structural and procedural organization) of the ecosystem that is regarded as a complex and heterogeneous unit. The term is used in the sense of control or regulation, even though the ecosystem is not a closed but rather an open system that encourages multiple actors to participate. The governance system can be distinguished in relational governance, contractual governance, and technology governance (Lumineau et al. 2020). Relational governance refers to polices on social norms and values, collaborative and functional relations, mutual agreements and consultations, as well as networking and exchange conventions. Contractual governance describes the field of legal affairs, contractual agreements and formalized rules, and guidelines and procedures. The technological governance area refers to the systematic and strategic management of the infrastructure. The collaboration model describes the relations between major stakeholder groups, including businesses, institutions, and users. The collaboration model indicates that an ecosystem is a composite of various actors and interests that each have their own part in value creation. In this respect, it is not surprising that ecosystem models are designed for illustrating collaborative schemes in a multifaceted surrounding that bring about interactions and services. In order to understand this complexity, it is necessary to derive the interactions that inevitably result from the cooperation and the respective interdependencies of the stakeholders. The digital ecosystem, which represents a complex value creation process, can be understood as a single multifaceted business model. Such understanding can be based on “a conceptual framework, to organize the value creation [. . .] and to guarantee profitability” (Wirtz et al. 2016c, p. 42). Business models have been an object of research for decades in management literature and have demonstrated to be a superior way of analyzing business procedures. Despite providing valuable insight into private business actions, business models are also relevant to illustrate value formation processes from a macro-perspective. In summary, the derived collaborative structure and the resulting interactions facilitate the identification of those value-added processes that are of crucial importance to achieve the target setting. The integrative approach is of great importance as it allows to illustrate the whole network of relations and interactions of stakeholders. This allows to identify the target groups relevant for a particular interaction by analyzing stakeholders and their interests and interactions in order to draw conclusions about the procedure and the mechanisms for ecosystem governance. The main challenge of management lies not in acquiring and using ICTs but rather in using them in an appropriate way by reforming obsolete measures and adapting respective forms of value creation or co-creation. Against this background, a business model illustrates the interactions of the actors and units involved and clarifies the way in which value is created for the customer. This is also the case in a digital ecosystem, which can be viewed as a complex macro-business that involves various stakeholders.

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Procurement and Procurement Interactions The interaction and service model of a digital ecosystem can be separated in eight subparts: (1) procurement, (2) procurement interactions, (3) knowledge creation, (4) value creation, (5) value capture, (6) resulting products and services, (7) provision interactions, and (8) customers. Aligned with the fundamental idea of business models, the procurement part describes the input to the ecosystem, and the customer describes the output part that addresses the ecosystem customer. In between the input (procurement) and the output (customer), the creation takes place consisting of knowledge creation (education and research services), value creation, value capture, as well as the provision of the products and services.Considering the ecosystem as a macro-organizational structure, the system is supplied by a multitude of providers that can be private or public in nature. Private providers can be of different kind such as ICT companies, cloud providers, platform hosting services, sensor developers, or commercial grid operators. However, a digital ecosystem often incorporates also public actors, such as agencies, social facilities, public suppliers (energy, IT, etc.), or statistical authorities.All those supplying actors are interrelated in the digital ecosystem and have each various interaction paths. They contribute to the basic value creation process by providing a specified service and product. The interaction paths can be regarded as the procurement interaction area. Since digital ecosystems are still a young and dynamic field, there is still a lot of research happening that is based on research and developing funding. This funding is one input to the ecosystem that can be provided by public and private suppliers. Moreover, there is a great need for information that is covered by external sources. The same applies to data storage services and general ICT provision. Each service is respectively compensated to the respective supplier by the actors involved in the value creation process.

Knowledge Creation Knowledge creation requires three essential inputs: data, funds, and manpower. In general, private sector companies fund research and development projects (R&D projects) in order to upgrade existing production technologies or advance service provision. Expanding knowledge requires highly educated, creative scientists recruited from a high-skilled pool of people who attend the respective educational institutions. The quality and creativity of the workforce, i.e., human capital, essentially depends on the general level of knowledge of the population, as well as on the quality of educational institutions. In turn, a higher level of human capital increases knowledge production and accelerates the transfer of general, theoretical knowledge to practicable expertise, thus improving innovative value creation.

Value Creation Value creation reflects the “traditional” part of the business model and states the process of adding value by combining various inputs during production to achieve a

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desired outcome for the customer. The objective of a digital service for the customer leads to two related but fundamentally different approaches to business: data provision and data hosting (Wirtz et al. 2010b). These differ in the manner of processing and commercialization of the respective data. Providing digital services to the market and respective customer requires the procurement of ICT hardware, software programing skills, and data. In turn, the industry is able to provide economic growth in services and satisfy the customers’ demand for digital problem solutions. In a digital ecosystem, service providers have the ability to administer real-time data that enables them to add value and thus complement economic wealth. To achieve this, actors of the digital ecosystem require the input of scientific knowledge or professional skills from the private or public sector in order to equip others with the tools to perceive, process, and use data for the development of new products and services.

Value Capture The creation of knowledge and value serves a purpose, which is usually the capturing of value of the actors involved. Such value capture refers to the idea of generating concrete utility, such as financial income or higher levels of income opportunities. Decision-makers and other actors use information from the value creation part to create corresponding service solutions in co-creation with their users. In a digital ecosystem, value capture is accomplished through the ICT-based augmentation of existing value creation processes, a respective adaptation of the service design process, as well as the incorporation of various actors for the creation of value. The value capturing practice is a core principle of business model thinking and is of utmost importance as the value creation alone does not satisfy involved actors.

Products and Services The three parts, knowledge creation, value creation, and value capture, lead to the respective products and services. In the digital business context, these can be differentiated in goods linked to the content, commerce, context, or connection type. Each model type describes its own type of service or product but does not limit the variety of products and services that result from the digital ecosystem.

Provision Interactions and Customers At the end of the value creation process are the customers of the ecosystem. These end users can be individuals but also private and public organizations. They consume products and services but also contribute to value creation by providing data, fees, as well as their participation in co-creation approaches. Considering the business model perspective, the customer is the core addressee of all activity of the digital ecosystem. However, as the ecosystem incorporates the customer into the value creation process, the customer becomes an integral part of the ecosystem and

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does not stand as an external target. In this context, the actors of the ecosystem are incorporating open innovation approaches into the value creation.

Digital Ecosystem Technical Infrastructure: Operational Models To complete the understanding of digital ecosystems in terms of the functioning and features of the fundamental technological infrastructure, it makes sense to think of infrastructure as the equivalent of a nutrient cycle. The data generated, stored, and processed by the respective software and hardware to host the higher-level features of the services is the critical nutrient of a system. Such a nutrient cycle represents the flow of this digital “matter” from production to storage and further processing. In this context, the software infrastructure model represents a simple data logistics process, consisting of the software responsible for data perception, the communication of information, and the subsequent operation of digital systems. Concerning the perception part, the term refers to programs capable of perceiving, recognizing, collecting, and exchanging information on the basis of visual sensor systems, acoustic sensor systems, tactile sensor systems, scanners or machine protocols, communication terminals, and databases. The communication part refers to software that merges, evaluates and processes the recorded data, and administers the results. There are two sides: the communication front-end and the communication back-end. The front-end works with the data from the perception part by processing or storing data, and the back-end provides data for respective activities by offering core or inference engines and knowledge databases. The operations part refers to software that plans and executes operations in the physical world based on the data input and the programming of the software in use. Therefore, this part represents customized operating software that forms the user interface. In contrast, the physical infrastructure maps the data usage cycle that consists, on the one hand, of a download stream that accesses the data stored in the databases via the network of ICT devices and, on the other, of a reverse upload stream that loads the data from the customer’s end devices into the respective databases. Concerning data processing and treatment, we distinguish data processing by software (software infrastructure model) from data transaction by the associated hardware (physical infrastructure model). However, this physical infrastructure needs to be controlled by a neural system responsible for accessing and processing raw data and providing edited datasets via service features. Therefore, the software infrastructure model constitutes a sequence from perception to communication and to operation, while the physical infrastructure model constitutes a hardware base build upon data servers, the Internet or network architecture, and respective endpoints or connected objects. Such an integrative perspective on ecosystems holds tremendous benefits as it aims at incorporating all relevant stakeholders as well as their activities and relations. The digital ecosystem framework illustrates the complexity of such a system but also indicates the most important layers and elements. Each part of the digital ecosystem has its role, which, taken as a whole, brings significant added value. In this respect, it helps to gain a holistic understanding of the system, which is fitted out by an

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overwhelming complexity. However, all frameworks work with a simplification of processes and with a reduction of complexity, which bears the risk of neglecting relevant aspects. At the end of the day, it is important to gain a general overview of relevant aspects of such ecosystems. The digital ecosystem outlined in this section describes a community value creation that is rational both individually and collectively because it is beneficial to all and should therefore be promoted by policymakers with supporting measures and policies.

9.2

Digital Disintermediation

Disintermediation in the Internet economy can be illustrated using the value chain. This is a chain that depicts all the stages that a product or offer passes through until it finally reaches the end consumer (Rayport and Sviokla 1996; Porter and Millar 1985). All stages include a process that adds value to the product or service. From a partially simplified aggregated perspective, the three stages of supply (production of the components), production (aggregation of the components into a marketable product), and trade (making the product available to customers) can be differentiated. These three stages can be further divided. At each stage of the value chain, important subservices that increase the value of the final product are provided. In this regard, it can be assumed that there is substantial competition between the individual stages for the creation of value in the production process.

The Role of Trade in the Value Chain In terms of the value chain, trade plays a prominent role, as it acts as a mediator between the manufacturers and the buyers of products. Thus, it does not add value to the product in the narrower sense but provides a distribution service by making the product available on the market. Making the product available is often associated with a substantial increase in value. In traditional economics, trade ensures four elementary distribution tasks that the producer himself does not carry out or cannot carry out efficiently. These are the spatial, temporal, quantitative, and qualitative transformation of products. The provision of these services is the original function of trade. As part of the spatial transformation, trade makes products available at the place of demand, so that the producer is not forced to set up his own distribution through sales outlets for end consumers. By establishing warehouses, traders can continuously supply consumers with goods, as they enable the storage of large quantities. As a consequence, manufacturers are largely released from warehousing, as they can supply traders continuously. Accordingly, this phenomenon can be designated as a transformation in terms of time. However, from a consumer perspective, the transformation in terms of quantity is of particular relevance, as it ensures the availability of small quantities in accordance with consumer needs. Finally, the transformation in terms of quality also plays a

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significant role with regard to the convenience for the consumer. After all, traders create assortments of different products so that the consumer can be extensively supplied by a single transaction partner. In the past, trade had a powerful position due to its status as a sales intermediary. For example, retailers could use the threat of denying market or customer access and thus exert pressure on manufacturers. This strong position enabled traders to increase their own share of the value at the expense of manufacturers.

The Internet and Its Potential for Disintermediation The Internet economy often undermines the power of trade. Due to increased market transparency, the associated reduction in friction, and decreasing barriers to market entry, manufacturers have new opportunities to enter the distribution business and take over this value-added process themselves. As this involves the elimination of the middlemen or of the mediator, it can be described as digital disintermediation (Slywotzky et al. 1999). This is illustrated in Fig. 9.3 (content based on Wirtz 1995b).

Distribution

Manufacturer

Distribution

Distribution

Wholesale Trade

Retail Trade

Consumer

Disintermediation Manufacturer

Digital Trade/ E-Commerce On-Demand-Distribution Logistics Provider

Consumer

Fig. 9.3 Disintermediation. Source: Wirtz (2020b)

Disintermediation means that the intermediary function of trade between the producer and the consumer is threatened. With the support of information networks, such as the Internet, the producer is able to gain direct access to the consumer (Wirtz 1995b). In this context, the manufacturer also has the possibility to fully take over the intermediary function of trade (Fritz 2004). In the long run, disintermediation will fundamentally change the structure of distribution, and the pressure on retail traders will continue to increase. More specifically, the Internet can help manufacturers to fulfill the four basic functions of retailing in the form of direct sales (Rayport and Sviokla 1996). As a consequence of the Internet, the spatial dimensions become increasingly insignificant, since consumers are able to search for, analyze, and also buy products regardless of their geographical situation.

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Therefore, a physical business for the presentation of the products is no longer absolutely necessary for a large number goods. In contrast, the transformation in terms of time cannot be entirely handled by the manufacturer. The purchased product cannot be picked up immediately, as is the case in a traditional retail transaction. Thus, there is an additional time span between product purchase and product delivery. With the help of modern parcel services, however, this time span can be reduced to an extent that meets the expectations of consumers. In the context of the quantitative transformation, manufacturers must adapt their warehousing and logistics policies to the new conditions of direct sales, as it is no longer possible to outsource this function to retailers. Disintermediation, for example, can significantly increase manufacturers’ warehousing and logistics capacities. In terms of qualitative transformation, the Internet also offers far-reaching opportunities for producers. Software solutions make it possible, for example, to combine the websites of different providers into digital marketplaces (digital malls), so that consumers can be offered a wide range of products. There are two main incentives for manufacturers to disintermediate: the internalization of the trade margin and direct access to the customer with the possibility of generating customer data specifically for product and service development (Wirtz 1995b). Figure 9.4 illustrates this situation. Disintermediation allows manufacturers to realize considerable cost reduction potentials by bypassing the wholesale and retail trade and thus shortening the value chain. The margin previously attributable to trading is now divided into two parts. The first part must be spent by the manufacturer to cover the distribution services itself. In this context, the establishment and maintenance of an end-customer sales department and the physical delivery of the products are of primary importance. In general, it can be assumed that manufacturers will not be able to serve end customers as efficiently as retailers, since the latter have a considerable advantage in terms of experience in distribution. This disadvantage is compensated by the use of digital distribution channels via digital networks and the associated cost advantages. The other part comprises the margin potential released by disintermediation, for which there are two fundamental extremes of action on the manufacturer’s side. On the one hand, he can internalize this margin potential and improve his return on capital. On the other hand, there is also the possibility of passing on the margins to the consumer. Such an approach opens up significant price reduction potential for the manufacturer, enabling him to offer at prices significantly below the previous retail prices. As a result, the manufacturer will generally be able to both increase its sales and improve its position vis-à-vis competitors. In addition to these priceinduced competitive advantages, however, disintermediation also has informationrelated advantages for the manufacturer (Harrington and Reed 1996). In the traditional sales chain, a considerable part of the relevant customer information is collected and processed by the retail trade, so that the manufacturer normally does not have comprehensive data on the purchasing and consumption habits of his end consumers. Thus, there is information asymmetry between the manufacturer and the consumer.

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Margin Potential

Disintermediation by the Manufacturer

• The manufacturer carries out the central functions of the trade • Trade is becoming partly obsolete in the value chain • The manufacturer has two decisive advantages through disintermediation

• The margin previously claimed by retailers no longer applies • The additional expenses of the manufacturers will usually not absorb them

Customer Data • The manufacturer gains direct access to the customer • The manufacturer can gain impulses for product development through the collection of customer data

Fig. 9.4 Advantages of disintermediation for the manufacturer. Source: Wirtz (2000c, 2020b)

Opportunities and Risks of Disintermediation If the manufacturer takes over the distribution task himself, he has access to all relevant customer data and can use it specifically for the initial development and improvement of products (Hagel and Singer 1999). In addition, the manufacturer can use this data to tap new market potential through targeted one-to-one marketing and selective individualization. Despite the numerous benefits that disintermediation provides for manufacturers, two central risks should not be underestimated. First, there is substantial conflict potential with retail traders during the development phase of the manufacturer’s distribution channels. This is largely due to the fact that the development toward digital business is a gradual process and the degree of digitization is still comparatively low. Eventually, established companies can offer their products and services exclusively via digital networks and thus completely abandon the traditional distribution network. A traditional example of conflicts between different distribution channels represents the computer industry. In the mid-1990s, the company Dell showed that computers can be distributed very efficiently via the Internet. The competitor Compaq also tried to use the Internet as a distribution channel. However, Compaq had to realize that they were losing large parts of their traditional distribution

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network. Thus, if Compaq had exclusively relied on direct sales via the Internet such as Dell, this could have led to a significant decrease in sales. The retail traders would threaten to immediately cease distribution, thereby eliminating Compaq’s main sales channel. After all, online distribution via the Internet cannot fully replace an established distribution network in the short term. By using this bargaining power, retailers can try to avert disintermediation. For manufacturers wishing to benefit from the margins of the retail sector through disintermediation, a strong sales channel management is crucial during the current transformation from the traditional to the Internet economy. Another risk of disintermediation for manufacturers is the complexity of distribution processes. Typically, manufacturers have little to no experience in the end-customer business and generally less process and logistics competencies than retailers. Due to inefficient distribution, there is a risk—especially in low-margin sectors such as food retailing—that the additional distribution costs will exceed the margins realized through direct distribution. Ultimately, this may negatively affect the bottom line of the respective manufacturer.

Disintermediation Case Study: HelloFresh HelloFresh represents a corporate example of digital disintermediation. It was founded in November 2011 by three entrepreneurs in Berlin with a small founding capital. The first ten customers were personally supplied by the founders (HelloFresh SE 2020b). Thus, HelloFresh was one of the first companies in the meal kit industry that delivers ready-to-cook and optimally portioned ingredients in packages to customers. In doing so, they bypass food retailing and send individualized recipes with the respective ingredients. Against this background, HelloFresh is the only intermediary between manufacturers (farmers and other food producers) and end consumers. This enables HelloFresh to achieve potentially high margins. By 2012, the company was already expanding into the Netherlands, the United Kingdom, the United States, and Australia (HelloFresh SE 2020d). By 2014, one million meals per month had already been delivered (Li 2014). In the early years, HelloFresh was financed by Rocket Internet, a German venture capital fund. Despite its substantial growth and 250,000 subscribers, the company did not report any profit by March 2015 (Financial Times 2015). Figure 9.5 represents the sales growth of the company HelloFresh. On November 2, 2017, the company went public in Frankfurt and was valued at 1.7 billion EUR, making it one of the few German unicorns (a start-up valued at more than one billion USD or EUR) (Reuters 2017). At the time of the IPO, the company had a market capitalization of more than twice the value of Blue Apron, its largest US competitor (Auchard and Schuetze 2017). Following the IPO, the company grew substantially. This is not only due to the fundamental success of the business idea but also due to major acquisitions. In March 2018, HelloFresh acquired Green Chef, a US company for organic meal kits (Molla 2018). In October 2018, the company also acquired the Canadian company Chefs Plate (Redman 2018). In 2019, Rocket Internet sold its remaining stake in

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Revenue in Million EUR 2000.00 1809.00 1800.00 1600.00 1400.00

1279.20

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305.00

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69.60 2014

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2019

Fig. 9.5 Development of revenues of HelloFresh. Data source: HelloFresh SE (2020a, 2020b)

HelloFresh to international institutional investors through accelerated bookbuilding at a high profit (EQS Group 2019). The company HelloFresh distinguishes itself in particular through its customer orientation and online marketing. It develops recipes on the basis of detailed customer preference analyses and compiles corresponding food products that can be used to recook the recipes. HelloFresh calls its packages cooking boxes, whereby consumers order their cooking box as a subscription and receive a delivery once a week. This ensures sustainable customer loyalty and a corresponding cash flow. In addition, the customer receives the recipe instructions per package in a handy card format. These recipe cards can be collected in a HelloFresh box and are thus available to the customer as a modified cookbook. In America, the subscriber can choose between four different types. In this way, he or she can integrate his preferences, for example, the preference for meat and veggies, only veggie, low-calorie, or family-friendly recipes into his or her order. Then, the number of people for whom the meal is intended and how many times a week the service will be used is specified. In this way, the customer can create a personal weekly offer. Figure 9.6 illustrates the American website of HelloFresh. In addition to digital disintermediation, the phenomenon of digital disruption also becomes increasingly apparent. Accordingly, the next section deals with digitalbased radical changes in existing value creation constellations.

9.3

Digital Disruption

Digital disruptions have become increasingly important in recent years. The term disruption is usually used for an interruption or an abrupt and comprehensive change. In addition to constant incremental adjustments by companies, these

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Fig. 9.6 Website HelloFresh. Source: HelloFresh SE (2020c)

disruptive market changes through technological and process-related innovations are the main drivers of change in economic activity. In doing so, they significantly modify the requirements for successful corporate strategies. Since the 1990s, there have been repeated fundamental upheavals in the context of digitization, such as the introduction of the smartphone, which has changed people’s everyday lives and fundamentally shaped the market architecture in many different sectors. Bower and Christensen (1995) state in their fundamental work on the topic of disruptions that companies that drive disruptions not only use advanced technologies but rather develop and apply new business models. These so-called disruptors use novel combinations of already existing components that are applied to an existing value constellation (Bower and Christensen 1995).

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The Structure of the Five-Level Model of Digital Disruption In principle, disruption can be explained by means of the five-level model of digital disruption. The first level represents the different forms of disruption. The second level describes the intensity of change associated with the various forms of disruption. The third level represents the actors in the disruption process. The fourth level describes the phases of a disruption. Finally, the fifth level depicts the influence of disruptions on the value constellation. Figure 9.7 shows the five-level model of digital disruption. Disruptions can be divided into different forms. Product or service disruptions are new types of products or services that change the market permanently and rapidly. Process or procedure disruptions, by contrast, are disruptions based on new approaches in the organization or in the value-added process. Business model disruptions often use new procedures but are usually based on combinations of new sales or management approaches together with innovative products or services. Social and societal disruptions are upheavals in the political or social structure of a society. System disruptions, by contrast, are disruptions that cannot be clearly assigned to a technology but rather introduce a completely new system, such as the Internet. In principle, disruptions can be classified in terms of intensity with regard to the changes they bring to the market and to society. Moderate changes, such as evolution or expansion and/or migration of market constellations, can be distinguished from disruptions as upheaval-like changes and can thus be described as incremental evolution. These include changes through continuous development and expansion of existing value constellations as well as changes in the development of new value creation approaches and business models. Radical changes due to a transformation of market constellations or other upheavals can clearly be assigned to the area of disruption. These changes include processes such as the establishment of new interaction paths between market players and/or a departure from existing development trends and technologies. Disruptions often go hand in hand with significant renewals of the market architecture and partly with the construction of completely new market segments and even sectors. After all, disruptions are always associated with a change in the competitive situation of established companies.

The Role of the Disruptor In the case of disruptions, there is usually an actor who drives the change and thus acquires a leadership role in the process of disruption. This so-called disruptor has a substantial influence on market events and puts established companies under great pressure to adapt to the disruption. At the same time, a disruptor often creates novel business models for new market players. An example of the role of the disruptor is the company Uber, which has developed a new transport service by using location technology in smartphones and integrating freelance drivers and their private vehicles. The introduction of such a transport service was not the invention of a new technology but the establishment of a new business model based on a sharing economy platform. Established players, such as taxi companies and drivers, public

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Forms of Disruption Product or service disruption

Process or procedure disruption

Business model disruption

Social and societal disruption

System disruption

…

Disruption Intensity Moderate change Evolution of the market constellation

Radical change Extension/migration of the market constellation

• Expansion of existing • Continuous value constellations development of existing value constellations • Development of new value creation • Market adjustments approaches and • … business models

• New paths of interaction between market players

• Major upheavals in market architecture

• Deviation from existing development trends and technologies • …

• …

Radical disruption of the market constellation

Transformation of the market constellation

• Development of new segments, markets, sectors • Radical competitive changes • …

Incremental evolution

Disruption/upheaval

Actors of Disruption Established actors

Disruptor

New actors • New suppliers/service providers through disruption

• Central actor/driver of a breakthrough innovation

• Example Uber: Uber driver, Uber service provider

• Example: Uber

• New market architecture/high pressure to adapt • Example Uber: Taxi driver, local transport provider

• …

• …

• …

Phases of Disruption 1. Disruption phase

2. Disruption phase

3. Disruption phase

4. Disruption phase

Development of the invention

Introduction of the innovation

Erosion of established companies and market structures

Assumption of dominant market position by the disruptor

• Disruptive innovation leads to fundamental market and competition upheavals

• Disruptor takes over dominant market maker position

• Technological inventions • Legal and procedural inventions • New organizational and combinational developments • …

• Market readiness and introduction of the invention • Customer and market acceptance of the invention • Disruptive innovation diffusion • …

• Existing suppliers suffer from significant loss in market share • Increase in the intensity of competition

• Growth of complementary followup services on the basis of disruption (development of new ecosystems) • …

• …

Impact of Disruption Value migration

Dominant position of the disrupter

Value creation/Value capture

Pre-disruption value constellation

Post-disruption value constellation

Fig. 9.7 The five-level model of digital disruption. Source: Wirtz (2020b)

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transport operators, and also automobile companies, have been under high competitive pressure after the disruptive introduction of Uber. The developmental phases of disruptions can also be derived from the example of Uber. The term disruption is often used misleadingly to describe a product or service in a finished state or at a specific point in time. However, disruptions are exclusively assigned to the use of new technologies, while process changes, business model innovations, and additional aspects are not sufficiently addressed. First of all, there are new innovations or inventions that do not necessarily have to be of technological nature but can often be process and procedural interventions or organizational and combinational developments. This is also shown by the example of Uber. Uber would not have emerged without the development of smartphones with location-based services, platform strategies, and the concept of sharing. The second phase of disruptions usually consists of the diffusion of innovation. This refers to the utilization of the corresponding inventions as well as to the successful market introduction. In this phase, the disruptor plays a crucial role. As the example of Uber shows, disruptors are often not the companies that produce the inventions but rather those that consistently use them for their own business model. It is important to bring inventions to market maturity and thus achieve customer and market acceptance. The third phase represents the erosion of established companies and market structures. A new market and value constellation is created, thereby distorting or breaking the existing market and value creation and in turn displacing established companies, products, and alliances (Bower and Christensen 1995). The example of Uber illustrates that global automotive groups are also facing considerable pressure to adapt their business models accordingly. For instance, due to the market presence of sharing economy providers such as Uber, Volkswagen has introduced new offers such as MOIA and WeShare (WeShare 2020; MOIA 2020). Taxi companies also see their existence threatened by companies such as Uber (New York Times 2020). For established providers, disruptions are sometimes accompanied by a significant loss of market share and lead to a substantial increase of competitive intensity. Finally, the last phase of disruption is usually characterized by the dominant market position of the disruptor. The example of the Apple iPhone shows how the positions of existing mobile phone manufacturers deteriorated significantly, as for the case with Nokia. Disruptors, especially in the digital business sector, often rely on the growth of complementary follow-up services that allow to establish new ecosystems through which the own market position can be strengthened. This strategy can be illustrated in particular by the Apple iPhone. In this regard, Apple was able to establish its own market platform through the development of the iOS operating system and the Apple App Store. The phases presented above indicate the strong influence that disruptions can have on existing value constellations. While markets in continuous change often develop cluster-like into complex supply networks with mutual dependencies, disruptions often manage to put the respective disruptor in a dominant position. On the one hand, disruptors create considerable value for their customers through new offers. On the other hand, they can cause substantial losses for established

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companies and often exploit their dominant position strategically and financially. These remarks clarify that the partners in the new value constellation are not equal. The disruptor takes on the role of the central company, which is referred to as the orchestrator or keystone (Wirtz and Becker 2002; Iansiti and Levien 2004b). These designations originate from the fact that the disruptor occupies a key position and combines various services into a new service offer for customers. Therefore, the disruptor has a prominent position as he shapes the value constellation through his activities. The orchestrating company is often also the company that is publicly associated with the disruption of the value network. Airbnb, for example, stands for the business model of low-cost short-term rentals. The value migration ranges from sectors and companies to the disruptor (Slywotzky 1996). The concept of value migration explains how value configurations can change in a value constellation. The focus of value migration is on the migration of customers. In this regard, changing customer requirements represent a crucial influencing factor. Successful disruptors flexibly respond to these modified preferences and adapt their business models accordingly. If modified customer demands and new business models that are better adapted to these demands than previous business models appear simultaneously, a profit migration occurs. Traditional business models are increasingly suffering from a loss of market share, forcing the companies to react. For this reason, it is crucial for the management of a company to recognize the trends toward value migration and to initiate appropriate measures with regard to the business models. In this context, it is highly relevant to identify the modifications in the value chain and simultaneously align the company’s value-adding activities with these insights. The predictions of value creation development must be aligned with the process model of value migration. The value migration model is geared to the relationship between market value and earnings. On the basis of this relationship, the process of value migration takes place in three phases (Slywotzky 1996). During the inflow phase, the influence of a business unit increases, as steady growth can be realized in the market. The registration of the inflow in the company and the corresponding alignment of the business models are indispensable in order to participate in new value creation systems. This is followed by a development phase characterized by stability, which is accordingly called stability. In this phase, the value structure is consolidated, market growth stagnates, and investments in the development of business models are reduced. Finally, the outflow phase is characterized by losses of value and a shrinking market. Companies lose customers and resources with increasing speed. In this phase, companies must implement appropriate skimming and exit strategies to avoid longterm losses. In addition, the business models must be adapted or restructured. However, the changing value creation can also affect internal factors. The starting point of this type of change process is at the level of the individual company. In this context, Heuskel (1999) presents an action-oriented approach based on the concept of Slywotzky (1996), which he calls business migration. Drawing from the development of business areas that transcend industry and product boundaries, the approach establishes a classification of value chain

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architectures that arise from a deconstruction of the classical value chain (MüllerStewens and Lechner 2016). Companies overcome traditional product and industry boundaries by selectively processing individual steps of the value chain (Heuskel 1999; Wirtz and Becker 2002). This illustrates how individual companies can react when, for example, existing value creation patterns have become obsolete due to value migration. Thus, it is a process-oriented representation of value creation strategies profoundly modifying a value constellation. In particular, young companies can shape their business model in order to make it inevitable for other market participants. In doing so, they can often claim a high proportion of the added value (value creation) in the form of financial revenues (value capture). In this context, a company seeks to maximize its own value capture so that the continued existence of its value constellation is not jeopardized (Wirtz 2018a). In the case of Airbnb, for example, the use of the platform is valued by the customer to such an extent that Airbnb can charge substantial fees to both the user and the provider of the short-term rentals.

Entrepreneurial Strategies for Digital Disruption After the five levels of disruption have been presented, Table 9.1 lists six digital disrupters that have changed existing value constellations in a radical way in recent years. It describes their strategies, business models, value proposition, and influence on existing markets. Tesla was founded in 2003 and has become the leading supplier of electric cars within a few years. By 2020, Tesla had already achieved a higher value on the financial markets than Volkswagen and Daimler combined (YCharts 2020a, b, c). Based on a disruptive strategy, Tesla has become a technology leader and a major competitor on the automotive market. Within just a few years, Netflix has become one of the most important media companies. In this regard, it was the first company to offer online-based non-linear consumption of audiovisual content in a consistent and customer-oriented manner. In doing so, Netflix has significantly changed the film and television industry. A similar situation applies to Airbnb that was founded in 2008 and has quickly become the world’s largest accommodation broker. In contrast, Amazon has become the central e-commerce provider and meanwhile represents the largest trading group in the world. The company Apple that has already distinguished itself several times as a disruptor with its Macintosh, iMac, iPod, and iPad products has introduced the iPhone in 2007. The iPhone in this case symbolizes the emergence of the smartphone as a groundbreaking product innovation. The smartphone with its expanded functions and new application possibilities enabled considerable social and economic upheavals, providing the basis for the business models of other companies, such as Uber and Facebook. The company Uber that was founded in 2009 has grown so rapidly that in just a few years it has become the world’s largest transport service provider. Accordingly,

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Table 9.1 Corporate examples of digital disruptors

Disruptor Tesla (Electric Cars)

Netflix (Streaming)

Aspects Disruptor Strategy • First-tomarket • Revenue market leader in the electric car industry • Market leader in the field of autonomous driving • Assistance strategy • Global economies of scale and scope • Focus strategy variations • ...

• Creating a global streaming platform for audiovisual media • Market leadership of quality films and customer preferenceoriented in-house productions • Global economies of scale and scope • Displacement of linear television • ...

Disruptor Business Model • Direct sales/no dealers • Greenfield investments • High depth of value creation • Consistent use of digital innovation/focus on software and driving data analysis • High degree of automation/ intensive use of robotics • Low product variety • ...

• Collection, selection, and compilation of audiovisual content • Initiation, negotiation, and processing of transactions in the form of paid subscriptions • Possibility of personalized on-demand online offers in contrast to cinema, film distribution, and television • Direct sales and access to customers • Global presence

Disruptor Value Proposition • Modern and safe electric vehicle with high range • (Partly) autonomous control • Ecological/ moral superiority • Lifestyle and identity of progress/ participation in technological upheaval • Low operating costs/partially free refueling • High proportion of smart technology/ Internet components • ... • Self-designed entertainment with a wide and deep range of offers • Personalized on-demand offer • Device independence (smartphone, Internet TV, laptop, etc.) • Flexible • No commercial interruptions • Variety of different offers • Internationality • ...

Market Impact • Attack and partial erosion of established car manufacturers • Creation of new market segment • Radical strategy adjustments and imitation by established suppliers • Shift in customer purchasing preferences in the automotive sector • ...

• Erosion of the linear entertainment model • Significant loss of market share for audiovisual providers • Significant shift in user preferences toward on-demand • Restructuring/ mergers of large media companies • New structures in film and serial production • ...

(continued)

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Table 9.1 (continued)

Disruptor

Aspects Disruptor Strategy

Airbnb (Private Rentals)

• Global offer of new/additional housing travelers • Creation of new market segments • Global economies of scale and scope • Information technology market dominance • ...

Amazon (e-Commerce)

• Creation of ecosystems for direct sales between manufacturer and customer • Establishment of a global e-commerce platform with the highest number of customers and product variety (longtail) • Professional, global, and fast logistics leader • Decentralized, device-

Disruptor Business Model • Audience big data-oriented film and series production • ... • Initiation, negotiation, and processing of transactions in the form of accommodation bookings • Substitution of traditional transaction phases via the Internet • Information brokerage and sharing economy as complementary rental offers • ...

• Initiation, negotiation, and processing of transactions in the form of purchases of all kinds • Substitution of traditional transaction phases via the Internet • Establishment of the central interface between buyer and manufacturer • Large customer database and systematic use of

Disruptor Value Proposition

• Globally positioned rental offer from rentals for landlords • Globally available offer • Insurance cover for bookings via the platform (residential property owners) • Lower costs than traditional rentals (hotels) • Authentic and individual accommodation • Transparent evaluation system • ... • High breadth and depth of product offer (product variety) • Customercentric individual commerce offers • Reliable service and fast delivery • Value for money • ...

Market Impact

• Erosion of market shares in the hotel and catering industry • Shift in user preferences • Intensification of price pressure and scarcity in the market for rental housing in urban centers • Growing tourism through cost reduction • Regulatory effort by state actors • ...

• Erosion of the retail trade • Shift in consumer preferences • Major disintermediation in various sectors • Monopoly structures • Adaptation of pricing strategies • Establishment of a new ecosystem • ...

(continued)

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Table 9.1 (continued)

Disruptor

Apple iPhone (Smartphones)

Uber (RideSharing)

Aspects Disruptor Strategy

Disruptor Business Model

independent, independent of time and place • ... • Establishment of a novel universal mobile media device • Digital and technological market dominance • Strategic establishment of a devicerelated ecosystem (new software and architecture) • ...

AI and big data • ...

• Creation of a new mobility segment in passenger transport (development of individual passenger transport through unused private vehicles and available manpower • Digital and technological market leader position • High economies of scale and economies of scope • ...

• Initiation, negotiation, and processing of transactions in the form of transport bookings • Supplementation/ substitution of traditional transaction phases via the Internet • Placement of individual private transport services via an app in a digital network • Increase in the utilization of private vehicles • ...

Source: Wirtz (2020b)

• Supplementation/ substitution of traditional transaction phases via the Internet (Apple Buy) • Worldwide distribution of universal mobile media device • Building new software and ecosystems • Establishment of new locationbased services • ...

Disruptor Value Proposition

• Universally usable individualized microcomputers • Creation of a communication platform • Haptic control of the interface • Worldwide networking through Internet access • High personalization through applications and user data evaluation • ... • Possibility to generate additional income (Uber driver) • Comparatively cheap (for users) • Fixed cost degression • Easy registration as a driver (Uber driver) • Exact pickup and destination locations (for users) • Short waiting time (for users) • ...

Market Impact

• Abandonment of the conventional mobile phone • Erosion of established mobile phone manufacturers • Building of a new ecosystem (Apple world) • Development of new market segments • Creation of complementary follow-up services based on the disruption • ... • Erosion of the business model of traditional taxi providers and public transport companies • Shift in user preferences • Changes in the volume of traffic in urban centers • Upheavals in local public transport and in the automotive industry through sharing • Regulatory efforts by governmental actors • ...

9.3 Digital Disruption

307

Uber significantly influences the passenger transport sector. In addition to the upheavals in passenger transport that have been caused by companies like Uber, the automotive industry is also facing major challenges resulting from the emergence of the sharing economy. In contrast to private cars, sharing providers can ensure a similar degree of mobility with significantly fewer cars by offering higher flexibility and capacity. This also endangers the future sales of car manufacturers.

Digital Disruption Case Study: Netflix Netflix Inc. is an American media company based in Los Gatos, California, which was founded in 1997 and today can be considered a disruptive player in the entertainment media industry. The company’s main business is its subscriptionbased online streaming service, which offers non-linear consumption of movies and TV programs based on a large online library of movie content. In 2019, Netflix had over 150 million paid subscriptions worldwide, including 60 million in the United States (Netflix Inc. 2020). It has offices in the Netherlands, Brazil, India, Japan, and South Korea and offers its streaming service almost worldwide. Figure 9.8 shows the development of revenue of Netflix since 2009. Netflix’s original business model involved selling and renting DVDs by mail. Netflix abandoned the sale just one year after its founding in order to focus entirely on the DVD rental business. It was not until 2007 that Netflix expanded its business by introducing video on demand through video streaming. This allows users to download desired content from an online service or consume it directly within the browser. The transition from offline to online also enabled users to rate movies and create individualized profiles that allowed Netflix to make personalized movie suggestions. Revenue in Million EUR 25000

20156 20000 15794 15000 11693 10000

8831 6780 5505

5000 1670

2163

2009

2010

3205

3609

2011

2012

4375

0 2013

2014

2015

2016

2017

Fig. 9.8 Development of Netflix revenue. Data source: Netflix Inc. (2020)

2018

2019

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Against this background, users are increasingly replacing linear television with online streaming services. This increasing consumption of ad-free audiovisual content on Netflix is changing the value constellation, which is much more complex in linear television than it is with Netflix. This becomes apparent when looking at the essential partners for the production of the television program. For example, television broadcasters involve not only various advertising partners and channel providers (satellite, cable, radio) but also various production partners in the program production process. In contrast, Netflix represents the intermediary between producers and users. In doing so, it provides access to a variety of productions regardless of time and is financed solely by the subscriptions of its users. This value migration from conventional television and cinema to Netflix also leads to an additional share of financial value creation (value capture). A major change came with the first in-house productions in 2012. They have enabled Netflix to adopt an active role as a producer of film and television series. These “Netflix original” productions are exclusively available in the online library for Netflix users (Michel 2014). The comfort gain and added value for users and the program flexibility compared to linear television strengthen Netflix’s market position (value migration and value creation). In contrast, this development leads to lower audience shares for traditional television and thus increases the pressure for attractive content (Jerzy 2019). By 2016, Netflix had already released 126 original series and movies, which is more than any other network or cable channel (Masters 2016). As a consequence, external movies or series are increasingly replaced by Netflix’s own exclusive productions. Thus, both the value constellation and the value capture continuously thrive for Netflix. The growing entertainment portfolio strengthens Netflix as a disruptor and further secures the company’s market power (Barker and Wiatrowski 2017). Netflix endeavors to produce new content and secure rights for additional content as well as the associated marketing efforts in 190 countries which require the company to take on large amounts of debt. In September 2017, Netflix already had a high debt ratio with loans amounting to 21.9 billion USD (Liedtke 2017). In 2018, the company declared that it would continue its strategy of expansion through debtfinanced in-house productions (Perez 2018).

9.4

Summary

• A digital ecosystem can be defined as an integrated framework of different digital actors, value chains, and business relationships that represent all digital business activities leading to a dynamic and complex relationship network that collaboratively creates value. It can be divided into two main parts, including the structure of the digital ecosystem (organizational models) and digital ecosystem technical operations (operational models).

9.4 Summary

309

• The structure of the digital ecosystem is captured in the first three layers and addresses the organizational aspects of the framework. These include a governance model for the regulatory part, a collaboration model focusing on the cooperation of different stakeholders, and a service model addressing the aspects of value creation within the digital ecosystem. • The digital ecosystem’s technical operation focuses on the technical foundations and consists of two layers. While the software infrastructure model addresses all software-related aspects within the technical basis, the physical infrastructure model reflects all hardware-related aspects. • The interaction and service model of a digital ecosystem can be separated in eight subparts: (1) procurement, (2) procurement interactions, (3) knowledge creation, (4) value creation, (5) value capture, (6) resulting products and services, (7) provision interactions, and (8) customers. • The integrative perspective of the digital ecosystems is useful as it captures all relevant stakeholders and their activities and relationships. The digital ecosystem framework illustrates the complex nature of such a system but also identifies the most important layers and elements. • Disintermediation means that the intermediary function of trade between producer and consumer is threatened. Disintermediation enables producers to realize considerable cost reduction potentials by bypassing the wholesale and retail trade, thus shortening the value chain. • The manufacturer benefits from digital disintermediation through direct data access to end customers, which enables one-to-one targeted marketing and selective individualization. However, there are also risks such as an increased potential for conflict with retail traders or the challenge of the complexity of distribution processes. • The five-level model addresses in the first level the different forms of disruption. The second level describes the intensity of change associated with the disruption. Then, the third level represents the actors in the disruption process. The fourth level describes the phases of a disruption. Finally, the fifth level represents the influence on the value constellation. • Disruptions can be divided into different forms such as product and service disruptions, process or procedure disruptions, business model disruptions, social and societal disruptions, or system disruptions. Thereby, disruption can be classified in terms of its intensity of change. • Within disruptions, there is one actor who drives the change and thus takes a leading role in the process of disruption. This disrupter has a considerable influence on market events and puts established companies under great pressure to adapt to the disruption. At the same time, a disrupter often creates new business models for new market participants.

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Chapter 9 Questions and topics for discussion

Review questions 1. Define a digital ecosystem. 2. Describe the structure, actors and interactions of a digital ecosystem. 3. Explain relevant aspects of the disintermediation value chain. 4. Explain corporate models of digital disruption (e.g. Airbnb, Amazon, Apple) based on the value proposition and the strategy pursued.

5. Describe the structure of the five-level model of digital disruption.

Topics for classroom discussion and team debates 1. Discuss to what extent a digital ecosystem represents all relevant actors, factors and interactions. Is this a way to show real companies like Apple how value creation works? 2. Disintermediation has fundamentally changed the value creation of non-material products in recent years. Discuss the winners and losers of this process from an economic, ecological and social point of view.

3. Discuss, on the basis of the disruptor Netflix , what opportunities and threats arise from digital disruption in relation to traditional media, on the one hand, and the new media, on the other. Consider whether the new value creation structure created is economically and socially desirable. Does the radical disruption in the digital sector ultimately lead to market monopolies?

Digital B2C Business Models

10

Contents 10.1

10.2

10.3

10.4

10.5

10.6 10.7

Basics of Digital Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Partial Models of the Integrated Digital Business Model . . . . . . . . . . . . . . . . . . . . . . . Classification of B2C Digital Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Content Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Content Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Infotainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Commerce Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commerce Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Attraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Bargaining/E-Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Tailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Context Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Context Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Catalogs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Connection Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Connection Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intra-Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inter-Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hybrid Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drivers for Developing Hybrid Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_10

313 315 323 324 326 329 332 334 336 336 338 339 342 345 346 348 349 350 352 357 360 361 362 364 367 369 371 373 373 376

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Learning Objectives By working through this chapter, you will be able to: 1. 2. 3. 4.

Define business models in a digital context. Explain the integrated digital business model by means of its partial models. Describe the revenue scheme of digital business models. Explain the basis for classification, as well as characteristics and differences of the business models of the 4C-net business model. 5. Give examples of hybrid business models and explain their advantages for customers and digital business companies.

10.1

Basics of Digital Business Models

313

Business models are an important topic in the management and business environment (Wirtz et al. 2016c) and have become even more important since the development of digital business has changed the way companies do business. In these fields, the term business model closely relates to creating competitive advantage. Moreover, the management of business models and organization success are frequently mentioned in one breath (Timmers 1998). The first section of this chapter deals with the basics of digital business models, followed by Section 10.2 that explains the content business model. In Section 10.3, the commerce business model is presented, followed by Section 10.4 that introduces the context business model. The connection business model is explained in Section 10.5: a distinction is made between intra-connection and inter-connection business models. In each of the sections, a special focus is placed on the particular value chain, core assets, and core competencies. Digital businesses are increasingly pursuing hybrid business models, which are presented in Section 10.6.1

10.1

Basics of Digital Business Models

The importance of strategic business models also relates to the significant changes in market conditions and competition with regard to digitization, globalization, deregulation, and economic integration (Fielt 2014). These changes have led to more dynamic, more competitive, and more complex markets, forcing companies to constantly adapt to ever-changing market conditions in a quick, effective, and efficient manner (Gordijn et al. 2001). Moreover, the process of designing and developing business models supports not only the generation of new business ideas but also the assessment of existing strategies, structures, and business activities. Thus, the business model concept supports organizations in systematically analyzing their success factors and adjusting their business activities in a target-oriented way (Wirtz et al. 2016c). Business models have therefore become an important leadership and management tool by simplifying the complexity of reality and shifting the focus from habitual to game-changing organizational activities. A rather simple but successful instrument for the representation of the value added of companies is the concept of value chain analysis by Porter (1987). The value chain serves the functional structuring of internal processes in order to identify starting points for improving the quality of products and processes. In addition, core assets and core competencies of a company in digital business are also of great importance for its long-term success. Assets are tangible and intangible resources that form the basis for the activities and competitiveness of a

1

See for the following chapter also Wirtz (2019, 2020a, 2020b, 2020c).

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company. Core assets are company-specific assets that have been accumulated or at least refined within the company and have a special value for the company’s value creation process. They are relatively scarce and difficult or impossible for competitors to imitate and substitute. They thus form the basis for sustainable competitive advantage. Competencies, in turn, constitute the basis for collective action in a company and enable the service creation process in which assets and core assets are combined to form marketable services. Core competencies are relatively scarce and difficult to imitate and contribute significantly to the perceived customer value of an end product, giving companies a sustainable competitive advantage (Wirtz 2011b). When talking about business models, one has to keep in mind that there is a general superordinate orientation reflecting the general demand. In business, for instance, this refers to a specific market that demands a particular product or service, such as the market for smartphones or fashion. Here, global trends set the overall direction for the respective business models while leaving niche markets on different levels. The scientific literature provides various business model concepts. The three main directions are the technology-oriented, the organization-oriented, and the strategyoriented approach. The technology-oriented business model approach is strongly influenced by the concepts of business process modeling and electronic business and explains many digital business concepts (Gordijn et al. 2001). Creating superior organizational design is at the heart of organization-oriented approaches. Here, size and composition of units, responsibilities, roles, organizational culture, organizational learning, etc. within an organization are defined to create a more efficient and more effective organization and thus a competitive advantage. The third direction is the strategy-oriented approach that creates a close connection between an organization’s business model and its strategy, taking into account the internal and external view on the organization, as well as its core assets and core competencies. Although these three main directions show clear differences concerning their orientations, all approaches share the assumption that business model processes are an important aspect: technology-oriented approaches regard process modeling as a vital factor, organization-oriented approaches consider process optimization as crucial, and in strategy-oriented approaches business model processes are a medium for operationalizing strategy. For this reason, processes are also a fundamental part of business models. Against the background of the different directions and large number of academic publications concerning business models, scientific literature shows various definitions for this subject (for further information on business models please, see Wirtz (2011a, 2020a)). Considering the existing research streams and taking into account the relevance of business processes, we propose a rather general definition for the digital business model.

10.1

Basics of Digital Business Models

315

Definition of Business Model (Wirtz 2011a, 2020b) A business model is a simplified and aggregated representation of the relevant services, processes, and activities of a company describing how information, products, and services that create additional value are developed and managed while also considering strategic and processual as well as demand components to support sustainable value creation. Business models can be found in various fields with differing scopes. A business model for a start-up company, built on initial data and assumptions and aiming to get the digital services running, as well as quickly acquiring a decent customer base, is significantly different from a digital business model that is applied, for instance, to a changed management process of a well-established, traditional business procedure. Irrespective of these potential deviations, the primary objective of the digital business model is always connected to developing, implementing, and maintaining a sustainable, successful business advantage. Furthermore, a business model should always integrate the relevant internal and external aspects and present an aggregated conceptual framework of the underlying components. This way, the business model illustrates the approach of creating better, superior service offerings and increasing value for the company in the form of a transparent conceptual framework. This framework consists of partial models that provide the basic input for the integrated business model, which is composed of three component layers: the strategic component, the customer demand component, and the value creation component. These three components consolidate the strategy so that it finally leads to an overarching business model that is set up on the necessary level of detail while providing the advantage of reduced complexity required for effective and efficient management.

Partial Models of the Integrated Digital Business Model The level of detail comes from the partial models that possess a crucial role within an integrated business model approach, since these are all closely intertwined, creating interdependent relationships. Figure 10.1 presents the partial models of the integrated digital business model described in the following (for further details on the partial business models, please see Wirtz (2011a, 2020a)).

• Cost structure model • Cash flow model

• Information analysis • Resource monitoring and controlling

Fig. 10.1 Partial models of the integrated digital business model. Source: Wirtz (2010b, 2020b)

• Capital structure

• Resourcing

• Value generation

Procurement model

Finance model

• Service charge streams

• Demand structure • Value offering/ products and services

• Commissions

• Competitors

Revenue model

• Business model partners

• Business model networks

Network model

• Service development

Value creation model

• Customer touchpoint

• Channel configuration

• Customer relationships/target groups

Customer model

Market offer model

• Core assets

• Strategic positions and development paths

• Value proposition

• Core competencies

• Company mission

Resources model

10

Value creation component

Customer demand component

Strategic component

Strategy model

Partial Models of the Integrated Digital Business Model

316 Digital B2C Business Models

10.1

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The strategy, resources, and network model form a superordinate unit in the integrated business model concept. Therefore, they are of particular importance in the analysis of the business model value creation (Lambert 2008). The strategic component defines the operating horizon of the other partial models and determines which types of value creation are generally possible (Wirtz 2020a). In the strategy model, the digital business leader determines the long-term targets of the company or the respective unit. Thus, this partial model contains the mission, the strategic positions and development paths, as well as the value proposition. This is based on a strategic situation analysis that considers possible changes in general conditions, scope for action, as well as strengths and weaknesses of a company (Wirtz 2013c). The resources model serves the integration and management of the company’s specific assets and core competencies. Therefore, the resources model represents a summary of all relevant value-creating input factors of the business model. It contains both internal and external resources and competencies. However, it should be noted that not all resources and processes are included in the model. Only important, business-relevant aspects should be enclosed. The network model provides an overview of vital business model partners that significantly influence business success, as well as of important connections between the different business partners. In doing so, this model represents a management instrument to control and manage different network partners, processes, and services. To this end, various tangible and intangible flows of information and goods are analyzed. In this way, particular stakes in value creation may be determined and classified to a network of connections and relations. The partial models of the customer demand component depict basic influence factors of the design and operation of a business model. The three main components are the market offer model, the customer model, and the revenue model. The information from these models describes the corporate environment and connects it to internal value creation by means of revenue. They are consequently the link between the business strategy and its value generation. Before transferring strategic targets to the process of value creation, adaptations to customer needs and market situations need to be made first. The data obtained by means of the customer and market components can also be used for the corporate strategy. The market offer model is concerned with the external demand analysis that primarily assesses stakeholder needs, demands, and behaviors. Here, further relevant external aspects like legal changes as well as future developments of information and communication technology are important, since these may influence online service provision. This model seeks to make use of available market opportunities. This partial model is therefore closely aligned with competitors, the market structure, and the value offer, in other words, the products and services. As a result, the company’s

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value proposition is developed and shaped against the background of an analysis of competing business models. For the development of the market offer model, an analysis of competing business models that affect their own business model is carried out as well. This process provides information on the specific company environment, consisting of value constellation partners and competitors (Kallio et al. 2006). The customer model is used to display the offers (products and services) relevant to the business model and the customer structure. The customers are segmented in order to define different target groups. Different strategies are derived from demographic differentiation criteria and differences in usage patterns. In the literature, the customer model is therefore also of particular importance for the development of a business model (Magretta 2002). Powerful information and communication applications support the necessary activities and thus offer the opportunity to determine demand according to the needs of specific customer groups. The segmentation of markets pursued to date on the basis of geographical, sociodemographic, psychographic, and behavioral criteria can therefore be refined. This ultimately means that individual customers and market segments (segmentof-one) can be addressed individually according to their specific preferences. In addition, innovative applications on the Internet make it possible to increasingly integrate end customers into the service creation process. In this connection, efficient and effective data management becomes more relevant to success in order to identify the needs and willingness of users to participate (Prahalad and Ramaswamy 2004). Actual revenue streams and their relevance to the business model are managed by the revenue model. This partial model depicts the value capture of internal value creation. This means that it clarifies how and to what extent the value generated can be monetized for the company. The revenue model is thus responsible for the absorption of a portion of the added value generated from the production of goods and services. The orientation of the revenue model is essentially based on specifications from the strategy model. The partial models within the value creation component comprise the internal value generation. In this context, the value creation model, the procurement model, and finance model are relevant. Here, the focus is put on how and under which conditions value can be generated by means of a central value creation logic. The partial models of value creation are thereby influenced by the strategic components as well as the customer and market components of the business model. The procurement model describes the structure and sources of the raw materials, goods, and services necessary for the production of value-added goods and services. In this context, the specific procurement phases of initiation, agreement, and processing must be addressed in order to ensure a structured procurement process, particularly by means of electronic procurement.

10.1

Basics of Digital Business Models

319

Furthermore, the market structure and market behavior on the procurement markets have a direct impact on the procurement model. For example, if there is a high market concentration on a procurement market, there are only few potential suppliers available who also differ only marginally in their offerings (peaceful oligopolistic behavior). This must be considered in the different procurement phases. The value creation model depicts the combination of goods and services as well as their transformation into offers. Here, the economic relationships between the input quantities of the production factors and the achievable output quantity are of particular interest rather than the technical laws of production. Based on the segmentation of demand, the service offer model provides information on which service spectrum shall be offered to which demanders or customer groups. The individual demand groups are each to be offered a segment-specific range of services according to their widely differing demand characteristics. In this context, the Internet and innovative information and communication applications have opened up the possibility of mass customization, thus realizing an individualization of the service offering at a low-cost level (Wehrli and Wirtz 1997). The finance model provides information about which financial resources are transferred to a business model and how the refinancing of corporate activities can be organized. Consequently, the model also shows the sources of financing for the business model. Furthermore, with the aid of data from recent periods, it enables an evaluation of the financial success of a business model and thereby allows to forecast prospective financing and liquidity requirements. The revenue model in digital business companies has numerous special features. In the context of the question of how revenues are to be generated, numerous different forms are conceivable. In order to be able to make a fundamental decision about possible streams of revenue in the context of strategic management, it is helpful to systemize the forms of revenue. Different forms of revenue can be formulated, and a classification can be made into direct and indirect as well as transaction-dependent or transaction-independent revenue. While direct revenues are generated through the product or service itself without the intervention of a third party, indirect revenues are generated through third parties. Transactional revenues are defined as revenues generated by a single, marketable transaction in the broadest sense or by interaction between the user of a service and the company. Otherwise, revenues are considered transaction-independent. Figure 10.2 schematically illustrates the revenue model system of digital business.

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Direct revenue generation • Transaction revenues in the narrow sense Transaction-based

Indirect revenue generation • Commissions

• Usage fees

• Setup fees Transactionindependent

Digital B2C Business Models

• Basic fees

• Big data/data mining revenues • Ad sales • Sponsorship

Fig. 10.2 Revenue scheme of digital business companies. Source: Wirtz (2000c, 2020b)

The importance of the various forms of revenue varies considerably. An isolated use of revenue models is rarely found. As a rule, several forms of revenue are combined. An important business decision of digital business companies is therefore the combination and weighting of the revenue forms in order to achieve an optimization for the source of revenue stream. In digital business companies, the direct, transaction-dependent forms of revenue can be transaction revenues in a narrower sense as well as connection and user fees. Transaction revenues in a narrower sense refer to the transfer of financial resources by the user to the supplier in exchange for a product or service. Here, payment is based on quantitative criteria, such as the number of results for a database query. Connection or user fees are charged for access to or use of a service, for example, billing for mobile Internet use based on the amount of data consumed. Installation and basic charges are to be subsumed under direct transactionindependent revenues. Setup fees are to be paid for the installation of a basic technology, for example, in the form of software required for the use of a product or service. Basic charges are incurred for the provision of a regular, potential opportunity to use a product or service. Commissions are regarded as indirect transaction-related income. They arise from the direct facilitation of transactions for affiliates, third-party partner companies. This can be done, for instance, by setting links. The link-setting company receives a percentage share of sales revenue from the facilitated transaction and accordingly only receives payments if a set advertising link is actually clicked on (pay-forperformance advertising).

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Basics of Digital Business Models

321

Commissions can also be earned through brokerage activities, for instance, through brokerage of financial investments. Indirect transaction-independent revenues are generated by ad sales, big data, data mining, or sponsorship. Ad sales in digital business describe the creation of third-party advertising space on their own website. In this case, revenues are already generated through the placement of the advertisement, independent of whether users actually click on set links. Here, the number of visitors to a page is essentially decisive for the value, for instance, evaluated via classic cost per mille. Big data or data mining revenues are generated by selling user profiles to third parties. User profiles contain detailed data on the characteristics and Internet usage habits of consumers. Revenues from sponsorship are generated by the mostly temporary, however, exclusive leasing of advertising space on the Internet to a third party. In summary, Fig. 10.1 depicts the aggregation of the nine partial models into one business model. This overview shows both the relationship between the individual partial models and their respective function in the value chain. The value creation and market offer model form the core of the business model. In order to realize the services, input goods must be provided as part of the procurement model. The finance model depicts the associated cash flows and related transactions. On the market side, the revenue model links the market offer model to the customer model, showing the exchange of services and revenue flows as well as the interaction between companies and customers. The strategy, resource, and network model provide important parameters within which the business model is set up. Figure 10.3 illustrates that the view of business models as an aggregation of partial models does not contradict its representation by means of value chains and their determinants but that these two views rather intertwine.

• • • • •

Product development Management infrastructure Customer-related services External services for the transaction

Coopetition potential

Cost structure

Value proposition

Offer 2

Innovation skills Process and structure competence Branch-specific competence Competence of the production of goods and services Customer relationship competence

• • • •

Non-product related intern services

• Alignment of the production factors

Non-product related dispositive services

Products & services

Cost structure

Value proposition

Offer 1

• Strategy positions • Business mission • Operative excellence: Operative profitability, complexity reduction, process reliability • Leadership values: Strategy consistency, performance culture, customer focus, personal development, promoting confidence and feedback • Growth and competitiveness

Payments

Services

Guarantees

Payments

Product development

Process of transformation

Market offer model

Competencies/Resources

Quality Quantity Reliability Flexibility

Source 2

Quality Quantity Reliability Flexibility

Products

Monetary input factors

Process of the creation of value

Value creation model

Business model

• • • • •

Business client

Private client

Customer model

• Small and medium-sized enterprises • Large enterprises and multinational concerns

Network

Cooperation Strategic partnerships Sales and subsidiary network Key accounts Payment networks

• Transaction • Interest payments • Fees • Provisions • etc.

Revenue

• Customer Input • Feedback

Interaction

• Presentation • Distribution • Service

Performance

Revenue model

10

Strategy

• • • •

• • • •

Source 1

Procurement model

Finance model

322 Digital B2C Business Models

Fig. 10.3 Interactions of the partial models of the business models. Source: Wirtz (2011a, 2020b)

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Classification of B2C Digital Business Models In order to be able to analyze business models consistently and manage them sustainably, an understanding of their respective characteristics is required. For this purpose, a business model typology adapted for the Internet is presented (Wirtz 2000c; Wirtz and Kleineicken 2000; Wirtz and Loscher 2001; Wirtz and Becker 2002). Business models of one type should be relatively homogeneous, and they should be as heterogeneous as possible between the types, so that the typology provides sufficient orientation, differentiation, and classification possibilities based on rigid distinction criteria from a conceptual perspective. Therefore, appropriate distinction criteria are required to form business model groups. However, a rigid and clear demarcation will not always be possible in an environment such as the Internet, which is characterized by high pressure to change and adapt. It may happen that a company has a core business model but that this model overlaps with other types of business models to some extent. Generally, business models can be described through their service creation process, respectively, their value chains, and their market offerings and thus be specified and differentiated (Wirtz 2000c). Due to the high complexity of value chains, however, these are rather not suitable for an initial distinction of business models. As a consequence, business models are often only focused on one essential component of the value chain. Particularly suitable as a distinguishing criterion is the service offering model. Therefore, it will be used as such in the following descriptions. The usefulness of this criterion results from several factors. First, it follows the historical development of numerous Internet companies that started out as pure players, i.e., each of them offered only one precisely definable service. For instance, AOL started as a pure Internet service provider (connection), Yahoo! as a pure search engine (context), and Amazon as a pure bookseller (commerce). The Interactive Edition of the Wall Street Journal initially offered only newspaper articles (content). Another important factor in choosing the service offering as differentiation criterion is the enabled homogenization of business models within groups, while at the same time these differ significantly from one another. Thus, companies within the groups have similar service offerings and processes. Since these are easily perceived by customers, groups of goods, and services result which are regarded as equivalent by customers and thus as possibly substitutable. Other distinction criteria usually only allow a significantly lower degree of homogeneity in group formation. In the case of distinction, for instance, based on demand groups or target groups (e.g., B2B, B2C), business models are counted twice in many cases, since companies are often active in several markets with different target groups. And certainly, companies with the same target group can have very different value chain processes and thus also business models. Finally, the broad range of demand that can be observed is another argument against classifying business models on the basis of demand or target groups. This classification would lead to a very large number of small groups and thus limit the

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operational feasibility, or else, if the number of groups was to be reduced, this would lead to very heterogeneous groups. According to their service provision, the business models of the Internet industry in the business-to-consumer sector can be classified into the following business models: content, commerce, context, and connection. This business model typology is called 4C-net business model and presents the most relevant business models on the Internet (Wirtz 2000c, 2010b, 2020b). Figure 10.4 shows the 4C-net business model.

Content • Compilation (packaging) • Presentation and provision of content on a domestic platform

Context

• Classification and systematization of information available on the Internet

Commerce • Initiation and/or settlement of business transactions

Connection

• Creation of the possibility to exchange information in networks

Fig. 10.4 4C-net business model. Source: Wirtz and Lihotzky (2003), Wirtz (2000c, 2020b)

The four business model types are first explained using the example of B2C relationships. The individual business models of the 4C-net business model, including the most relevant subcategories, are presented in the following. In order to provide a structured and comprehensive analysis of the business models of the 4C-net business model, first an aggregated value chain is developed for each business model. Then, the relevant core assets and core competencies are explained. Finally, the subcategories of the 4C-net business model, in case subcategories exist, are defined based on the service offering model.

10.2

Content

The content business model consists of the collection, selection, systemization, compilation (packaging), and delivery of content on a domestic platform. The aim of this business model approach is to make content accessible to the user over the Internet in an easy, convenient, and visually appealing form. The content offered can be informative, educational, or entertaining in nature. The content business model accordingly comprises the subcategories e-information, e-education and e-entertainment, as well as e-infotainment.

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Content

325

In order to implement an offer that benefits customers, numerous core assets and core competencies are relevant for the business activities presented. A mix of various service offerings could create synergy effects that then could be used for the actual core business model of a content provider (Wirtz et al. 2011). In addition, the complementarity of the range of services is favored by the general trend that customers expect diversified service offerings from a single source. Consequently, this explains that a sharp distinction between the individual business model variants of content providers is not possible without exception. This will be particularly clear in the practical examples given. Like the general subdivision of the 4C-net business model, the subcategories of the basic content business model serve to show the range of activities of various Internet companies, initially in ideal-typical structures. Figure 10.5 shows the content business model and corresponding subcategories.

• Compilation (packaging) • Depiction and provision of content on a domestic platform

Content

Ee-Entertainment

e-Information

Ee-Education

• e-Politics – state.gov

• e-Games – partypoker.com

• Virtual University – vu.org

• e-Society – thesun.co.uk

• e-Movies – movies.com

• Public Education – salto-youth.net •…

• e-Economics – wsj.com •…

• e-Prints – gutenberg.org – worldlibrary.net

• e-Music – mp3.com •…

e-Infotainment

– nba.com – sportsline.com – ...

Fig. 10.5 The content business model. Source: Wirtz (2001a, 2020b)

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E-information providers emphasize the informative character of content with regard to the value proposition. Content is informative for users when it entails information for the solution of a problem or covers a general or socially relevant area. Politicians, for example, are very keen on using the Internet to transfer information in order to win voters or to spread general party-political information. An increased demand for problem-solving information exists, for example, with regard to economic information when making decisions on a credit or investment. Entertainment content represents the core of the service offer of the e-entertainment business model, serving the users as a form of pastime, as well as for diversion and relaxation or as a means of distraction from everyday situations. The difference to informative content rests upon the fact that the user cannot directly use the multimedia data acquired to solve a problem or accomplish a task beyond the scope of the media use. The e-infotainment business model integrates entertainment and information aspects. This combination of relevant information and entertaining multimedia aspects is mainly a result of the aforementioned trend that digital business companies rather prefer to diversify their service offers than being a niche provider to increase the number of active users. This strategy further traces back to the revenue model commonly used by content providers, which rests upon indirect and mainly advertising-based revenue in order to make the offered content freely available (Pauwels and Weiss 2008). Of course, educational content can also be exciting and entertaining. Regarding electronic educational content (e-education), however, a distinguishing characteristic, common to any educational content, is that it is didactically prepared in order to achieve a successful learning process. By means of a document, such as a certificate of participation, it is confirmed that a user has taken part in the digital educational program. Building on this general information on types of content, the generic value chain of a content provider as well as the core assets and core competencies are explained in more detail. Finally, specific service offerings of individual business model variants are presented.

The Content Value Chain When presenting the content value chain, we not only discuss relevant aspects of the value chain but also implicitly address the respective partial models of a business model, in order to comprehensively understand the core activities. Figure 10.6 illustrates the value chain of an ideal-typical content provider.

10.2

Content

Conception • Content selection • Service selection • Design • Determination of the target group

327

Content Development/ Production

• Content procurement (content sourcing) • Content creation • Usergenerated content

Acquisition & Placement of Advertising

• Standardized banner advertising • Integration of individualized advertising • Sponsoring

Technical Distribution

Marketing & Distribution

• Pull (i.e., download) • Push (i.e., RSSfeed)

• Cross-medial marketing • Coordination of the sales channels • Price and conditions strategy • Communication strategy

Billing • Payment processing • Receivables management

Fig. 10.6 Aggregated value chain of the content business model. Source: Wirtz (2010b, 2020b)

The beginning of the value chain is characterized by reflections on the conception or design of the service offered. In this connection, a content provider must decide which content and services shall be offered in which format to what type of customer (Wirtz 2011b). A supplier of general information can, for example, categorize provided services as free content, pay-per-view content, or paid subscription content and thus diversify the range of services (Prasad et al. 2003). These different forms of usage can still be enriched with supplementary services, provided that the customer can clearly identify the added value of the premium offer for each form of usage (Choi et al. 2009). In addition to the considerations in connection with the service portfolio and service differentiation, the content provider needs to decide on the form of presentation for each type of content (format design). For instance, a specific online learning platform for students will, for didactic reasons, be designed differently than a website for interested voters providing general information on political parties and its members. Moreover, the available broadband capacities enable the use of different formats. Especially infotainment providers complement purely text-based formats with audio and video files to create a multimedia environment that can attract more users. The selected online content for the offers can be either purchased on the market or produced by the company itself. The purchase of general interest content takes place, to a great extent, over news agencies like Reuters. These news agencies usually offer the content to the purchasers and users in digital form, so that they can easily integrate it into their online offer without technical problems. An example in this connection is the video offer by the New York Times. The creation of content by the content provider can increasingly be observed in the context of special interest offers. The financial platform Onvista, for example, provides general financial market information and produces videos with regard to selected stock topics. Furthermore, the Web 2.0 and social media have significantly changed the production of content. Examples of this are the various forms of opinion formation in the context of customer recommendations at Amazon or the contributions of users to the online encyclopedia Wikipedia. These forms of content are called user-generated content (Wirtz and Ullrich 2008). In this connection, a content provider needs to pay special attention to questions of copyright and exploitation rights with regard to the information or content provided by the users.

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Depending on the content provider’s selected service and price differentiation that influences direct revenues, content providers often have to deal with indirect revenues from advertising or sponsoring. In this context, the management needs to pay special attention that the paying users are not exposed to too much advertising in order to justify the premium offer (Prasad et al. 2003). In doing so, content providers can choose from a variety of different advertising formats (Turban et al. 2018). For example, they can select standardized formats that are displayed depending on the type of user (e.g., banners, buttons, pop-ups) or designed individually, for instance, in the form of flash animations integrated in the content. In the connection with user-generated content, platform providers can only generate indirect revenues, to a great extent. The video platform YouTube is an example where the advertisement is fine-tuned to the video in order to create the highest possible fit between the current interest of the users and their consumption desires. Usually, blogs also do not generate direct revenues through payments by the users but instead are financed indirectly through advertising revenues. Other offers in the context of user-generated content are free of ads and financed instead through donations, such as the online encyclopedia Wikipedia. Here, it is important to note that first-copy costs are crucial in connection with digital content and the costs of reproduction and distribution are only marginal. The distribution of content can generally take place in two ways. In the first case, the user actively accesses the content (pull) by retrieving it directly from the Internet to use it online or offline. This also includes the mere viewing of content on the platform of the content provider. In the second case, the content provider decides when the content is made available to the customer. The provider usually pushes (push) the content to the users. Generally, the users must have logged into this service or have given their approval to receive this content. The provider then delivers the entire content, such as text or a multimedia file, to the user’s end device. This can happen either cyclically or irregularly, depending on the topicality. Besides a PC or a notebook, this also involves mobile end devices such as PDAs or mobile phones. Examples for this type of distribution are newsletters or RSS feeds, which send the latest news on specific topics directly after publication. In this context, it becomes apparent that the Web 2.0 or social media and the accompanying changes in the Internet have a significant impact on content distribution. While the content mainly used to be transferred in a B2C environment, one can now increasingly observe C2C content transfers. In this connection, the content can be transferred via private networks (VPN) or directly between mobile devices. It therefore makes sense for content providers to provide several different distribution channels and include C2C distribution in order to exploit further marketing potential (Feng et al. 2009). After securing the service offer and the technical requirements of content distribution, marketing and sales ultimately need to realize the designed service and revenue models. The holistic understanding of marketing that underlies these steps contains all marketing-oriented activities of a company, as well as the consideration of the entire marketing apparatus.

10.2

Content

329

In addition to the usual online marketing activities, companies can also carry out cross-media and offline activities in order to gain attention from potential users. The New York Times, for instance, advertises its content offer nytimes.com not only in the news subscriptions of Google News but also particularly on private TV broadcasters in the context of special program topics. In this connection, the distribution also needs to be managed. This particularly includes the coordination of distribution channels, the pricing and conditions policy, as well as the communications policy in order to ultimately acquire potential customers. The last component of value creation that directly emerges from distribution refers to billing. This includes aspects with regard to the payment system and receivables management of the acquired license agreements. Here, several forms of payment are conceivable. While a credit card is commonly used in connection with pay-per-view or PayPal, a content provider can also offer its subscribing customers payment through billing or direct debit. This can reduce the fairly high transaction costs of credit card payments for content providers, particularly in the case of a small payment amounts (Turban et al. 2018). After having presented the value chain of an ideal content provider, the following addresses the core assets and core competencies, which are important requirements for content providers to successfully and sustainably survive in the highly competitive market.

Content Core Assets and Core Competencies The major core assets of content providers include their offered content and their exploitation rights, as well as the associated brands. In relation to self-created content, the responsible employees can also be regarded as core asset. Moreover, particularly networks are also core assets of content providers. According to the definition of the content business model type, the content is an essential component of the value creation and service offer. In the case of general interest providers, the ability to combine own content and purchased content is a core asset. Content purchased from news agencies can generally not be understood as a core asset because competing providers can also acquire this content. The use of synergy effects by means of purchased content is also understood as a core asset in the case of general interest providers. For instance, different multimedia content is shared between usatoday.com and STUDIO Gannett, and the different Internet offers of the Random House publishing group increasingly draw on purchased content. In the case of special interest providers, by contrast, the self-created content and related exploitation rights are a core asset. Special interest providers can resell these rights to other content providers or establish a unique selling proposition for themselves. In context of the web 2.0 or social media, the associated user-generated content is also a core asset. Without the active participation of the numerous users worldwide, offers like YouTube would not exist. A core asset that is usually even more important than the actual content is the content provider’s brands. In this context, a brand has different meanings. Here,

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professional brand management can create preferences for its own service offer and distinguish it from competing offers (Park et al. 1986). Brands represent a value proposition and are associated with certain, mostly positive product characteristics by the customers. In the context of information services, source credibility is an important product feature to set oneself apart from competitors. Their significance is enforced by the Internet, in which contracting partners do not interact face-to-face but only virtually (Jevons and Gabbott 2000). A good reputation has a positive effect on the value of the created content, which in turn can be understood as a core asset. Employees are know-how carriers and often have specific skills that distinguish a company from its competitors. The combination of individual skills within a team can improve service delivery and thus yield a competitive advantage (Manville and Ober 2003). Here, the content creation in the editorial sense and the selection of content, as well as the focusing of the employees within the scope of online learning offers, are particularly relevant. For instance, if a renowned professor is willing to lecture in a virtual university, this can be also understood as a core asset. Networks serve content providers particularly for information procurement in order to acquire input for the creation of content. Networks not only require intensive care and often personal commitment; they are also grown historically and therefore difficult to imitate. In addition, the lack of potential network partners limits the imitation opportunities. Networks are also a core asset, provided that they are highly important for service provision and give content providers a differentiation or cost advantage (Wirtz 2011b). The use of core assets requires core competencies. Content providers’ core competencies particularly refer to content sourcing, content creation, and product development and distribution. Technology competence is only of minor importance to content providers and may be purchased on the market. Hence, technology competence is not a core asset. Content sourcing competence describes the ability to gain high-quality information and entertainment content, as well as authors or producers as input for content production. Competitive advantages particularly arise when exclusive content can be procured. This pertains especially to providers of special interest content, because they can achieve greater differentiation from competitors. In this context, the ability is helpful to connect a large number of users to a network and provide a platform for people or companies, especially when the users contribute content (user-generated content). Successfully creating online content requires a strong content creation capability. While here different sub-competencies can be distinguished, the trend and refinement competence are particularly important to content providers on the Internet. Trend competence represents the ability to pick up on social developments at an early stage and convey new content to the interested recipient. However, the transformation of general information into high-quality informative or entertaining online products, such as podcasts or blogs, is referred to as refinement competence. Overall, these sub-competencies are highly media, genre, and format-specific because the factors that make content attractive from the audience’s point of view are different, depending on the purpose of media use and the target group. For

10.2

Content

331

instance, the production of informative content requires the use of other skills than the production of e-education materials. The content creation competence is strongly influenced by the implicit knowledge of the employees and by organization-specific routines. For outsiders and especially competitors, these mechanisms of action are hidden and difficult to understand, thus making this competence difficult to substitute or replace. The product development competence contributes to an advantageous positioning on the recipient and advertising markets. It consists of the ability to develop promising formats and to position them in the relevant markets. In addition, the product development competence requires a great deal of knowledge about specific market segments and in part rests upon the trend competence of the content provider. The specific knowledge, in turn, is only available in terms of implicit knowledge in the company and is therefore not transferable. A balanced product portfolio is of considerable importance in the sense of a business model that is intended to generate sustainable and steady income streams. The distribution competence includes the cross-media exploitation competence and the ability to actively integrate a C2C distribution into the content business model. It generally refers to the ability to the timely delivery of content in the desired quantity and through the appropriate channel for the recipient. On the one hand, content often needs to be adapted to the respective target group in a channel-specific manner. On the other hand, content providers in the context of digital business also have to be able to control the technology and logistics of the distribution channels. Figure 10.7 summarizes the core assets and core competencies of content providers.

Competitive Advantage

Core Assets

• Content, exploitation rights • Brand • Employees • Networks

Core Competencies • Content sourcing competence • Content creation competence • Product development competence • Distribution competence

Fig. 10.7 Core assets and competencies of the content provider. Source: Wirtz (2010b, 2020b)

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The service offers of the content business model types, e-information, e-education, e-entertainment, and e-infotainment, as shown in Fig. 10.5, are specified in the following. In doing so, their respective characteristics are addressed and current practical examples adduced by way of illustration.

E-Information E-information places special emphasis on the informational and problem-solvingoriented content. If an information provider concentrates on a specific subject area, the business model type e-information can be subdivided into service providers with a particular focus on political, social, or economic content (e-politics, e-society, and e-economics) (Wirtz and Becker 2001). By concentrating on a specific topic, such as economic information, suppliers of informative content can provide an added value to customers in the form of greater information depth. Examples of political content providers are the United Nations (un.org) at the international level and the US government (usa.gov) at the national level. Here, one can find comprehensive information on a wide range of political topics, some of which have also been didactically prepared. Commercial interests are less important for these providers than the information request. However, in addition to the financing by means of public budget resources, user-based revenue forms are also conceivable (e.g., direct revenue through book sales). The websites museumsusa.org or closerweekly.com offer social information. On the website museumsusa.org, the user can check the museum’s opening hours and read short descriptions of current exhibitions or search artist or monument databases. Moreover, the magazine Closer, for instance, focuses on the topics lifestyle and society news in its online edition, using multimedia and networked content, such as podcasts or online voting on lifestyle issues. E-economics content is concerned with information from and about the economy, as well as information that is intended for the economy. The online edition of the Wall Street Journal (Wsj.com) represents the first category. The Bloomberg Group that offers magazines, company information, product information, and financial information “for the economy” belongs primarily to the second group. The transitions are smooth because information about the economy is also interesting for other economic actors as recipients. However, a business model type does not necessarily have to specialize in only one branch of information. Similarly, business models are conceivable that offer several information branches. These providers reach a high coverage through a broad range of information across all areas of interest. The Interactive Edition of the Wall Street Journal or the online edition of the New York Times provides crossthematic information from the fields of politics, society, and economy. As a result, they provide a service offer for a wider circle of readers than just for a special professional audience. An example of an e-information provider is the simplified business model of the Financial Times illustrated in Fig. 10.8.

Strategy Model

Payment / Fees

Provision of Content

Payment

Services

Compensations

Accepting Content

Report of Content

Finance Model

• • • • • • • •

…

Banner Advertising

Advertising Space

…

Recommendation Services

Expert Forums

Connection

…

Databases

Live-Ticker

Special Interest Content

Competencies/Resources Model

Placing / Inclusion

User / Expert Interaction

Offering of Content

Public Interest Content

Content

Market Offer Model

Access experts and correspondents Large and global customer base Preparation, systematizing, collection and provision of data, Strong brand, deonymization Contextualizing competence Technological competence Content creation competence Competence of promoting advertising efforts

Management of Web-Based Cooperation

Administration of Communication

Editorial Creation of Own Online Content

Collection, Selection, Systematization and Compilation of Content

Value Creation Model

Network Model

Advert-Revenue

Interaction

Bank of America

Private Consumers

Customer Model

ILLUSTRATIVE EXAMPLE

Subscriptive Payments

• Presentation • Distribution

Performance

Revenue Model

• Formal and informal to news agencies • Access to key informants • Network to professional freelance correspondents and journalists • Member of key research and investigation consortiums • Access to rights and proprietary databases

Integrated Product/Service Offer

• The Financial Times (FT) is one of the world’s leading business news and information organizations that provides extensive news, comment, data and analysis to the global business community

• Bank of America • …

Advertising Clients

Expert Forums

• Reuters • Bloomberg • ….

News Agencies

Procurement Model

Financial Times

Customer Relationship Management

10.2 Content 333

Fig. 10.8 The business model of the Financial Times. Source: Wirtz (2019) and own analysis and estimations

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The size of the fields in the service offer model indicates the importance of the corresponding area. News agencies report content to the online edition of the Financial Times, which is then collected, selected, and compiled. Besides this, the editorial team creates its own online content. This content is provided on a separate platform for the customers of the Financial Times. The services of the Financial Times in the field of content include public interest content, special interest content, a live ticker with current economic news and stock prices, as well as various databases. The Financial Times also offers expert forums and recommendation services in the connection area. Revenues are generated through banner advertising and advertising cooperation, as well as through subscriptions of paid newsletters for customers. These services are also distributed via innovative channels, such as smartphone apps or RSS feeds.

E-Entertainment The business model type e-entertainment differs from e-information in that providers do not offer informative, but primarily entertaining content. The importance of the Internet as an entertainment medium is confirmed by studies that show that online entertainment is even more popular with teenagers than television in the US market (Turban et al. 2018). E-entertainment includes a broad range of offers and can be divided into subcategories, such as e-games, e-music, e-movies, or ee-prints (electronic entertaining prints). Online games include various forms of games and contents. Here, one can distinguish, for example, between individual or multiplayer offers and the type of content, such as adventure, card, sports, or classic casino games (Turban et al. 2018; Wirtz 2020b). An example of online games is Americas Cardroom. On the Americas Cardroom website, the provider of various card computer programs offers a platform for virtual card games. The revenue model of Americas Cardroom consists of access fees to the game servers. The company PokerStars that is registered in Gibraltar also offers platforms for various online casino games. The PokerStars website offers poker players the opportunity to play against each other in tournaments. There are both play money and real money tables with different magnitude of stakes. The website is available in several languages and contains teaching information about the poker game itself as well as information about the software and the offered tournament types. The highly profitable poker platform PokerStars generates revenue through advertising and merchandising as well as direct revenues, for example, as a percentage of distributed profit sums or bets. In connection with the legal framework of digital business, it is worth mentioning that the company was forced to cease all real money games in the US market in 2006 due to the Unlawful Internet Gambling Enforcement Act (UIGEA).

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Content

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The website Movies.com is an example of the business model type e-movies and offers users movie sequences and rankings of current movies, as well as background information about actors and movies. A very popular example of a platform that offers video content is the YouTube platform. This is also a good example of user-generated content in the context of Web 2.0 and social media, as users can provide private videos on YouTube’s servers. These videos are then accessible by keyword search. The main core asset of YouTube is the user community of registered users who want to post videos. The community thereby relies to a great extent on users’ self-control. The users can report content that they consider as illegal or inappropriate. YouTube then checks the content and removes it if necessary. Google, originally launched as a search engine operator, bought the company YouTube Inc. founded in February 2005 for 1.65 billion USD in November 2006, although it had not been able to make a profit before. Its main value drivers were the YouTube brand and the user community. As the above example shows, the latter also takes over most of the editorial services. Electronic entertaining prints (ee-prints) includes all readable electronic and entertaining content, ranging from comics in the online edition of the daily newspaper to multimedia content. An example of ee-prints is the portal Worldlibrary.net that offers a comprehensive collection of electronic books (e-books). In addition to classics of literature and entertainment literature, there are also writings by unknown authors from all over the world as well as a collection of nonfiction books. Another type of e-entertainment is offered by special formats like audio books. In this context, books are read aloud or abridged. Depending on the quality of the speaker and the intended display format, this speech can take the form of an entertaining radio play. The content-related spectrum of audio books ranges from entertaining literature to text-heavy nonfiction books. Audio books are thereby limited by the fact that visualization possibilities are missing. This can be compensated by combining the audio book offer with other media, such as an accompanying book. Unlike podcasts, audio books are usually also available in stationary retail and designed similar to printed books with regard to their presentation. Carrier media for such editions are usually audio CDs. Audio books for download on the Internet are also usually available as paid content, but sometimes also free of charge, for instance, when their copyright terms allow it due to their age. A major supplier of audio books in the US market is audiobooks.com. While the acquisition of digital audio data is still dominated by illegal online file sharing in peer-to-peer networks, platforms become increasingly established that allow the legal download of copyrighted music. One example is the online platform Napster. The offer of such platforms is often complemented by text contributions about artists and albums. The company Apple with its platform iTunes is a pioneer with regard to the business model of digital music download with respect to digital rights management. The iTunes platform is particularly adapted for the use with the iPhone, iPad, and iPod and benefits from the core competencies of Apple in the IT sector.

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E-Infotainment The separation between informative and entertaining content is not always possible. In light of the increasing amount of data and information, playful learning and the entertaining presentation of information are becoming increasingly popular particularly on the Internet. Especially due to commercial interests of content providers, it is important to make the offer attractive, in order to bind as many users as possible over a longer period to information-oriented websites. If the users appreciate this format, their increased willingness to pay improves the chance of generating direct revenue. The retention and extension of the user base simultaneously increases the possibilities of generating indirect revenues. In addition, the value of a network increases with the number of users and the usage intensity. These business model types thus represent a mixed or hybrid form between e-information and e-entertainment and are accordingly referred to as “infotainment.” An example of the business model type infotainment is the website of the television station Fox (Fox.com). Besides program information, Fox.com offers entertainment elements in the form of background stories about popular television series of the channel. A very vivid mix of information and entertainment as well as the convergence of the media television and Internet is the documentary series “Come Dine with Me.” While entertainment is the focus of TV series, users can download detailed information on cooking recipes from the programs on the website. In addition to community functions, such as chat and forum as well as an own mailbox, there is also content exclusively offered to registered users that is supposed to lead users to register due to an expected added value. Another example is the website of the football-oriented print magazine Pro Football Weekly. Profootballweekly.com offers comprehensive information on the US National Football League as well as background information and football-related news. In particular, the UPickem contest is very popular. Here, the players can bet on game results. Since these results are based on real sports events, the participants are encouraged to follow the real results on the websites of Pro Football Weekly or to purchase the print edition. This supports the objectives of user retention in terms of usage frequency and usage time. A group-specific component is particularly attractive in this context. Individuals such as friends or colleagues can form groups and compete against each other. However, the registration in the Pro Football Weekly community and the compilation of the teams and bets are associated with a high expenditure of time, which in turn can be interpreted as a lock-in effect.

E-Education A further business model subcategory of the content segment is e-education. Two characteristics distinguish e-education from the other content offers. First, education does more than merely present information. Information should be passed on to

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Content

337

learners in a didactic manner and be internalized by them as knowledge. Learners should also learn analytical skills, structured thinking, and problem-solving competencies. The second distinguishing characteristic refers to awarding titles or certificates based on the performance and the respective specific syllabus. This is not part of e-information or e-entertainment. Although the popular high score lists in computer games offer similar incentives, their significance is generally limited to the game and its community. The aim of e-education is the resource-efficient delivery of educational services via location- and time-independent application of electronic networks. Here, the company itself or third parties outside the company can offer network-based education. With regard to the recipients of education and training services, one can distinguish, for instance, between schools and universities (virtual universities) and adult education. An example of an e-education offer is the website vu.org, a purely digital university, which provides a study program and a recognized certificate awarded upon successful completion. Participants receive course material either via email or by postal mail. Once completed, the material is sent back to the course instructor at the university for correction. Another example is the online portal mheducation.com of the American traditional provider McGraw-Hill, which offers multimedia, modular learning content, especially for adult education. An initiative of the European Union (Salto-youth.net) focuses on the education of young people in Europe and offers content with a focus on social skills. It is about both content-related skills and online media skills for using online learning environments. Especially in light of growing financial restrictions, providers of education services are increasingly forced to supply their services cost-effectively. They are also required to deal with greater competition due to the increasing demand for educational services. E-education is particularly able to cope with these restrictions and challenges due to the technological possibilities of the Internet economy. On the one hand, the digital educational infrastructure allows developing new training tools and concepts, such as multimedia learning modules for self-controlled learning progress or online exchange processes with teachers and instructors for feedback and improvement of educational processes. On the other hand, existing functions, such as the aggregation and distribution of educational content, can be designed and performed more efficiently (Twigg and Miloff 1998). Finally, there are some mentionable particularities with regard to the revenue models. In contrast to the other subcategories of the content business model, e-education offers are mainly characterized by direct forms of revenue, especially course fees. Many offers particularly with regard to media competence are supplied by public institutions that are financed by budget funds. The variety of education offers makes it difficult for public institutions to follow the principle of subsidiarity

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and not to compete with commercial providers of education offers. The case study on Wikipedia in Section 18.1 presents a successful implementation of the content business model.

10.3

Commerce

The commerce business model entails the initiation, negotiation, and/or settlement of transactions via the Internet (Solaymani et al. 2012). Its aim is an online-based supplement or even substitution of traditional phases of a transaction (Wirtz 2020b). While content providers try to convert the content they offer into monetary success, the planned monetary performance of commerce providers is a service function, namely, the marketing of services and products. Since it is a service, a company with a commerce business model does not necessarily have to own the goods or services to be marketed. As Fig. 10.9 shows, the business model can be further subcategorized into the business model types e-attraction, e-bargaining/e-negotiation, and e-transaction. A fourth variant is referred to as e-tailing and cross-sectionally comprises several aspects of the three previously mentioned commerce variants.

• Initiation, negotiation and/or settlement of business transactions

Commerce

E -Bargaining/ E-bargaining/ e-Bargaining/ E-negotiation E -Negotiation e-Negotiation

E-attraction e-Attraction • Online advertising – google.com/adsense

• Auction – ebay.com

• Market place – shopping.com

• Price-seeking – pricegrabber.com

•…

•…

e-Transaction • Payment – paypal.com – paybox.com

• Delivery – fedex.com – ups.com •…

e-Tailing amazon.com

- amazon.com … - ...

Fig. 10.9 The commerce business model. Source: Wirtz (2010b, 2020b)

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The business model type of e-attraction refers to all measures that support the initiation of transactions. These factors, for example, include online advertising (e.g., banner placement) and the provision of marketplaces. Hence, other commerce business models are, in turn, possible in these marketplaces. In this connection, the sector pertaining to the business relationship among consumers, so-called C2C-relationships, is becoming increasingly relevant. Such relationships arise, for example, over the eBay platform when a private provider sells to a private bidder. Since a large number of professional providers meanwhile also use eBay, the latter also handles B2C transactions and even B2B. The business model type of e-bargaining or e-negotiation focuses on the negotiation of terms and conditions. An important parameter that is frequently subject to negotiation with regard to a given product or service is often only the price or other conditions of purchase. Auctions represent a pricing mechanism frequently used in this context. The provider of the service does not necessarily have to moderate or take on the role of conducting the negotiations in such business models. The wellknown example of the auction house eBay shows that the subject of the business model can already pertain to the provision of the technical platform, on which the providers and buyers then conduct their negotiations. The business model type of e-transaction addresses the settlement of transactions conducted via the Internet. The transaction type, in turn, can be subcategorized into payment and delivery. The former requires a high degree of trust in the service provider. The latter requires a digital business company to have functioning interfaces to the real world of physical products, for example, to logistics service providers, provided that non-digital products were the subject of a transaction and now have to be delivered. Many of these functions, such as goods presentation and transaction processing, are already familiar as the role of classic retail. The task of an online retailer who has integrated several of these functions in his business model is therefore also referred to as e-tailing. As the aggregated value chain of the commerce business model shows below, retailers may have various functions and tasks. These functions, however, are supplemented by Internet-specific options and features. Subsequently, the relevant core assets and core competencies are examined in order to finally go into detail about the specific service offerings in the e-commerce sector.

The Commerce Value Chain The general value chain can be adapted to the specifics of a commerce model in digital business. Just like in the case of content providers, the value chain of this business model type encompasses specific commerce aspects of all essential partial models, as indicated in Fig. 10.10.

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Offer Design • Assortment design • Determining target group

Offer Presentation • Shop design • Product presentation • Service design • Experience design

Digital B2C Business Models

Marketing/ Transaction Initiation

Completion/ Price-Setting

• Interconnectedness • Brand development • Customer acquisition • Sales activities

• Contract finalization • Price determination • Payment handling • Distribution

After-Sales Services/ CRM • Customer relationship management • Customer data management

Fig. 10.10 Aggregated value chain of the commerce business model. Source: Wirtz (2010b, 2020b)

At the beginning of the value-added chain, there are considerations about the service model, i.e., which services should be offered to which target group. The service offer of the commerce business model can be traced back to the areas of initiation, negotiation, and processing. The service offer can be understood as a service to help the target groups to purchase the desired products online. In this context, the assortment design is of particular importance. Certain strategies such as differentiation and niche retail are of particular interest. While Amazon, for example, is an all-round provider on the Internet, specialized electronic commerce businesses such as inkjetsuperstore.com are focusing on specific products, such as toners and cartridges for computer printers. The selected strategy also strongly determines the relevant target group. While inkjetsuperstore. com is predominantly targeting price-conscious customers and small companies as buyers, the target group of Amazon is more heterogeneous, thus making a concrete target group determination rather difficult. A phenomenon increasingly associated with Web 2.0 or social media and the range of services offered by commerce business models is the “long tail.” The “long tail” describes the fact that the Internet, and in particular the developments regarding Web 2.0 and social media, allows offering niche products to a broad mass of interested parties, thus calling classic service offer models into question. For example, a number of various niche products, especially in the book and music segment, can generate more sales on the Internet than individual bestsellers of mainstream players (Anderson 2008). Once the segment, the assortment, and target groups are defined, the service offer must be presented to the target groups within the next step of the value chain. In this context, the digital shop design is particularly important in order to be successful on the Internet. In order to achieve a successful, virtual shop design, the aspects of product awareness, service quality, shopping experience, and customer risk must be taken into account. Product perception depends, to a large extent, on the presentation of goods on the Internet (Liang and Lai 2002).

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Commerce

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In this context, it is necessary that the presentation of goods is carried out in a way that is appealing to the customer and that the product details as well as the price are presented in a uniform and clear manner. The quality of the presentation of goods determines the perceived service quality. In addition to the user-friendliness and the quick response time of the website, a simple purchasing process is crucial for successful e-commerce services, as it makes shopping easier for customers and increases further sale opportunities. The repeated use of the e-commerce offer also depends on the buying experience itself. E-commerce vendors therefore must increasingly integrate an experience design into the presentation of the offer. For example, the auction process on eBay to determine the product price is a special experience for many users, since the price can be actively influenced and thus the auction may be perceived as exciting. Other providers on the Internet deliberately rely on the world of multimedia experience and integrate product videos and feedback systems and other interactive features into their presentation in order to offer an experience beyond mere purchase. Moreover, transaction security and privacy are highly important to the customer. In addition to a positive reputation, which very few companies achieve on the Internet, certification of the commerce offer is particularly important in order to be recognized as a trustworthy supplier. The value-added activity of marketing and transaction initiation encompasses networking, the development and maintenance of brands, as well as elements of customer acquisition and other sales promotion activities, which have become increasingly important in the context of Web 2.0 and social media. Due to the ever-increasing networking between users, consumption patterns are also changing drastically. Commerce providers need to take this into account in order to take appropriate marketing measures. In the context of Web 2.0 and social media, it is important that customers have the possibility to actively communicate their opinions on products and services. Positive buying experiences and public customer feedback are important requirements of referral marketing (Riegner 2007; Villanueva et al. 2008). Internet users’ buying behavior is often guided by the opinions of other users rather than by their trust in corporate advertising. The same applies to the use of brands. Brands are also of particular importance in the area of commerce, as they generate reputation effects and create trust. In the case of e-commerce providers, both own and marketed brands are important. Another aspect regarding commerce providers is product bundling and the individualization of offers. In the context of marketing and sales, a commerce provider can try to uncover the specific wishes of its customers by means of data mining and hence make concrete, individually bundled offers. Once users are aware of the e-commerce shop and want to conduct a transaction, the next value chain process, the transaction and the pricing process, is initiated. In the commerce business model, this means bringing together suppliers and buyers in order to create a legally binding contract.

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In order to comply with the concluded purchase agreement, the commerce provider also has to accomplish or arrange the distribution of goods. In the case of digital goods (e.g., software), this can be done, for instance, by means of a personalized data access to a protected area on the Internet platform or by means of a product release code for software on a disc. The delivery of physical goods is more challenging, as it must be organized and the seller will be kept responsible for it in most cases. In the case of an e-commerce platform, the distribution is usually provided through the involvement of an external retailer, whereby the intermediary platform (commerce provider) can offer a service guarantee (Amazon). The after-sales aspect is particularly important for commerce providers, since customer loyalty cannot be reached by means of personal contacts, local proximity, etc., like in traditional retailing. Data mining is considered to be the most important element in after-sales, as it allows companies to analyze the needs of their customers and, ideally, to anticipate purchasing behavior. In this context, a best practice example is Amazon that derives customer wishes by analyzing customers’ purchasing history. In doing so, preferred genres of customers or the last articles viewed are repeatedly displayed in order to encourage the user to buy. There is also the possibility to place discounts and incentives for good customers in order to influence repeated purchases.

Commerce Core Assets and Core Competencies In addition to a customer base or network, core assets of businesses that follow the commerce model are, for instance, customer data, sales, and technical infrastructure, all of which are crucial factors for long-term success in the Internet. The attractiveness of an online presence for commercial partners largely results from its popularity indicated by the number of visitors and thus the potential customer base of the market place. The more potential customers are registered on a commerce platform and use it on a regular basis, the greater the probability of purchasing. In this context, it can be considered a core asset of a commerce provider if its customer base has reached the critical mass, as it also increases the provider’s attractiveness (Arthur 1996; Turban et al. 2018). The critical mass of a customer base is significantly related to the customer network. The permanent inter-connectedness and collective opinion formation among users in the context of Web 2.0 or social media makes shopping experiences or service quality increasingly public and may trigger network effects. In the case of positive feedback from the customer base, it can be assumed that the number of users and thus the potential customer community of a commerce platform increases through word of mouth. Strong private brands or brands for sale can further strengthen this core asset.

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The customer database is one of the major core assets of commerce providers (Chaffey et al. 2019). Data mining techniques allow to identify structures, patterns, and relationships that are economically usable. Such information may be either sold or used for company-specific purposes of customer relationship management, in particular, for individually promoting products and services. Companies that recognize cross-selling and up-selling (sales of supplementary or higher-quality products) potential among customers at an early stage can increase sales through a targeted promotion approach. Finally, the sales infrastructure, such as a joint payment system of the marketplace or concerted marketplace advertising, is important for the development of core assets of a digital commerce provider. In this way, synergy effects can be exploited on a platform-wide basis through a uniform payment procedure, and, in addition, the risk perception of the buyer can be minimized. This, in turn, can lead to a higher service quality and thus to a larger customer base. In addition to transaction processing, the sales infrastructure should also ensure the rapid and reliable distribution of the products. It is a core asset of a business to have a smooth physical distribution system that minimizes distribution costs, for instance, through long-term agreements with logistics service providers. As an alternative to external service providers, an own logistic infrastructure can be set up. If this provides a competitive advantage, it can be another core asset. Amazon’s Prime Now offer is an example of this proceeding. Prime Now customers can choose from a wide range of products (e.g., groceries, everyday items, electronics, clothing, books, etc.) and have them delivered within a 2-hour window. The delivery can be tracked in real time (Amazon 2020c). Another core asset is the technical infrastructure of hardware and software of the commerce platform, which serves to provide the service offered with the necessary reliability. Generally, the technical infrastructure can be acquired and copied and thus does not guarantee sustainable competitive advantage without restrictions. However, a specific technical system including the persons responsible for operation, maintenance, and further development is not path independent in terms of required performance, configuration and development level. Thus, it can also be regarded a core asset. The electronic commerce platform eBay, for example, serves as an illustration. If one were to buy source code and server, short-term operation would be possible, but maintenance or even further development without the programmers and their experience with this system would be very difficult. The technical infrastructure is also crucial for transaction processing. In this context, it is particularly important to ensure reliable and secure transaction processing. Confidence in the respectability of market players is a key factor for all parties involved, platform operators, as well as suppliers and consumers (Turban et al. 2018). Of particular importance is risk minimization in payment processing. Transparent guidelines and procedures are as important as reliable technical availability and protection against abuse. The successful use, combination, and development of core assets requires core competencies. Commerce providers should in particular have competencies in

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assortment design, bundling of offers, and experience design as well as in building and operating the technical infrastructure. As is generally the case with business models, the need for efficient customer data management is particularly important in the commerce sector. Assortment design competence refers to the ability to present the relevant products and services attractively to the customer and to offer them at competitive prices. This ability of a commerce provider is crucial for establishing a critical customer base and expanding it, as the switching costs between providers on the Internet are particularly low and customers are therefore very price- and serviceoriented. Only efficient price benchmarking with direct competitors or incentives relevant to purchasing, such as discounts or special services, enables companies to retain their customer base in the commerce sector. One example is Amazon’s Prime program, which exclusively provides customers with free premium shipping and unlimited streaming with Prime Video and over one million songs with Prime Music. Free shipping as a Prime member is one of the main reasons for customers to shop on Amazon, and the number of Prime subscribers is increasing steadily (Statista 2020h, j). A closely connected capability is the bundle competence. In this context, an additional service can be provided to the customer when the retailer submits proposals for complementary products based on historical consumer data (Yang and Lai 2006). This ability is also expected to include similar products and the use of cross-selling or up-selling potentials. In addition to the conception of product bundles, bundling of prices in the commerce sector is of particular importance. The ability to develop experiences is also a core competence in light of the increasing experience orientation among consumers. This can be achieved, for example, through a special design of the web shop or through the aforementioned aggregation of various service offers. For this purpose, the special properties of the Internet can be used in a targeted way, for example, through multimedia content, such as images, music, or video sequences. In addition, involving actors and other users in the platform offer may lead them to identify themselves with the platform in the sense of belonging to a community, thus creating a lock-in effect (Wirtz and Ullrich 2008). For a commerce provider, the ability to efficiently manage the existing technical infrastructure is important. In this context, both the hardware and the software used can be included in the technical infrastructure. The simultaneous access of various stakeholders to the commerce offer means that the provider must ensure that the technology used is functioning properly. The software used must also enable errorfree and intuitive data management for potential external suppliers to provide the product. Figure 10.11 summarizes the core assets and core competencies of the commerce model.

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Competitive Advantage

Core Assets

Core Competencies

• Customer base

• Assortment selection

• Customer network

• Bundling competence

• Customer data

• Experience design

• Sales structure

• Sales structure

• Technical infrastructure

• Technical infrastructure

Fig. 10.11 Core assets and competencies of the commerce model. Source: Wirtz (2010b, 2020b)

The following section presents the services offered by the different commerce business model types e-attraction, e-bargaining, e-negotiation, e-transaction, and e-tailing in more detail. The service offering of the e-tailing service business model has a cross-sectional function. Explanations are dedicated to the characteristics and specifics of the individual business model types, and examples are given for a better understanding.

E-Attraction The initiation of transactions is the core of the commerce business model type e-attraction. In this context, the design, marketing, and placement of advertising space on the Internet is the key activity offered by e-attraction providers. Dynamic, contextual advertising is, for instance, provided by Google’s AdSense service. This service uses its powerful search technology, which seeks to evaluate texts automatically in the sense of a semantic web technology. The algorithm analyzes content on the clients’ websites and prioritizes the matching search results on the Google result list. It therefore scans content from sites and places ads that are potentially relevant to the target audience. Google offers a similar process for search results pages, in which ads are selected in the context of the respective search terms. Figure 10.12 shows the example of a search on Google for the search term “smartphone.” The search results are complemented by ads that are related to the search term “smartphone.” The appearing ads vary when the search is repeated.

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Fig. 10.12 Example of context-specific advertising of Google. Source: Google (2020c)

Marketplace operators generate revenue primarily through retailing or commissions from providers for the goods traded through their platform (pay-pertransaction) and in some cases charge monthly fees for their services. In addition, advertising banners and links to the websites of the manufacturers of offered products are possible, whereby the marketplace operator usually requests a fee per click (pay-per-click). In addition, data mining revenues are based on user and customer profiles that emerge from their business transactions.

E-Bargaining/E-Negotiation The business model type e-bargaining/e-negotiation focuses on the negotiation of business transactions. In the case of a given product or service, the price or purchasing conditions are often considered to be important parameters to be negotiated. Essential pricing services are auctions and the search for the cheapest product or service (price seeking).

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An auction service, well-known due to the success of the online market place eBay, is using an interactive price-setting approach. An important advantage of auctions is that they offer a standardized mechanism that reveals supply and demand in a market. The consequence is an increase in market transparency (Lee 1996). In addition, online auctions are suitable to attract a large number of bidders, due to the amount of people using the Internet. Three basic types of auctions can be distinguished on the basis of actors on the buyer and the seller side (Turban et al. 2018). Figure 10.13 illustrates these types of auctions.

Buyer

Seller

One

Multiple

One

Multiple

Not Applicable

Reverse Auction

Forward Auction (English or Dutch Auction)

Double Auction

Fig. 10.13 Types of auctions. Source: Wirtz (2010b, 2020b)

Only three of the combinations illustrated describe auctions in the strict sense. In the event that only one buying party meets a selling party due to a lack of alternatives, their respective market power determines the price and no auction takes place. This constellation hardly plays a role on the Internet, due to the high number of potential buyers or sellers that are available as possible alternatives. The standard case of online auctions is the forward auction, in which one supplier faces many potential buyers. The bidding can take place in two ways: In the case of the ascending auction, the potential buyers make bids and at the end of a fixed time frame the highest bid wins the auction (English auction). In the case of the descending auction, the sales price drops at certain time intervals until the first buyer places a bid (Dutch auction). On eBay, the English auction is the usual auction procedure. The reverse auction is the basis of a public tender: a demanded service is circumscribed and potential suppliers bid at what price they could perform or supply the demanded service or product. Without considering other factors, the lowest bid wins the auction. The tendering service, whocanfixmycar.com, for instance, allows

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individuals to enter what needs to be fixed on their cars, and garages nearby are informed and can send in quotes. The lowest offer wins the reverse auction. The best example of double auctions, in which many suppliers meet many buyers, is the formation of stock prices on the stock market, which are now essentially handled via electronic trading platforms. The Internet provides timely information and participation in the market for private and institutional investors. The Internet enables private and institutional investors to obtain information and participate in the market very quickly. Another business model variant in the field of e-bargaining/enegotiation is price seeking. By means of price seeking, the customer specifies a product he or she wishes to purchase. The company then determines the cheapest offer for the selected product. An example of this business model variant is Pricingcentral.com or kelkoo.co.uk. Kelkoo compares prices of merchants that have previously registered (Kelkoo 2020). This approach is a typical example of the core assets and core competencies of a commerce provider. E-bargaining/e-negotiation providers in the area of price seeking can generate advertising revenues and transaction-based dealer commissions. The transactiondependent commission usually depends on the respective market power of the e-bargaining/e-negotiation provider. E-attraction providers can distinguish between pay-per-transaction and pay-per-click. Auction service providers, in contrast, mainly generate revenue from transaction-related fees. Advertising revenues account for only a marginal share of revenues.

E-Transaction The business model type e-transaction relates to the handling of transactions on the Internet. E-transaction can be divided into payment processing and delivery. A payment system specifically for online transactions is PayPal, for instance. It allows users in more than 200 countries to transfer money via the Internet. Once users have registered for a PayPal account, they can then pay and receive money with their PayPal account that uses direct debit and credit card or bank transfer. PayPal offers the buyer several security measures. Particularly important to most users is that no bank connection or credit card data is exchanged between buyers and sellers. Moreover, PayPal offers a so-called buyer protection. This includes that payments can be returned if the transaction is not implemented in accordance with the agreed contract. An increasingly popular payment processing method is mobile payment. Apple, Amazon Pay, Facebook, Google, PayPal, and Samsung, for example, have mobile payment solutions with which they want to open up the mobile payment market (e.g., Apple Pay, Samsung Pay).

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Commerce

349

In addition to payment processing, the delivery of purchased goods is an important aspect. In case of information-based products, such as software, the distribution can take place directly over the Internet. Peer-to-peer networks have technical advantages over monolithic server structures when a large number of users download or stream large files such as films. Physical products, in contrast, must be transported to the customer in a traditional way. Unless own distribution capacities of the manufacturers or dealers are used, the transport is usually outsourced to external service providers such as DHL or United Parcel Service (UPS).

E-Tailing Electronic retailing, or e-tailing, covers the entire process of initiating, negotiating, and handling transactions with consumers via the Internet. Online retailers therefore often supply an integrated offer of several commerce services—from the presentation of the offer to the handling of monetary and physical transactions. Some of the major online retailers also include e-bargaining offers. An example of a successful online retailer is Amazon. After products or services have been delivered by the various manufacturers, they are collected and systematically presented to the customer. Incoming customer orders are received and handled by Amazon. After payment has been made, the orders are forwarded internally and the products are packed and shipped. Apart from Amazon and other pure online retailers, traditional retail companies with real-world shops increasingly establish e-commerce platforms on the Internet. Websites such as walmart.com offer products online that either can be delivered to the buyers’ home or can be picked up at the store right away. Particularly suitable for the distribution over the Internet are goods with the following characteristics: high brand value, for example, through high brand awareness or guarantees; digital goods (e.g., software and music); and low-value as well as regularly acquired and standardized goods (e.g., office materials, books), where an assessment of the physical product is unnecessary before the purchase. The same applies to goods in standard packages that are known from classical retail trade and generally not opened or inspected there. Since the travel and tourism industry is one of the most successful business segments online, it serves as a good example. Online travel booking and planning includes both flight and hotel bookings and all other travel services, such as car rentals or related insurances. These travel services are usually standardized products that need little explanation beyond the information available online. At the same time, tour operators also increasingly offer and sell vacation packages via the Internet. Figure 10.14 shows the starting page of travel booking platform Opodo. com that has an especially diversified range of services.

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Digital B2C Business Models Login and personalized areas

Diversified range of services

Quick search function

Fig. 10.14 Services of Opodo.com. Source: Opodo (2020)

The case study on eBay in Section 18.2 serves as an exemplification of the commerce business model.

10.4

Context

The context business model focuses on classifying and systematizing information available on the Internet. This function can be subdivided into search engines, web directories, and bookmarking services (see Fig. 10.15). • Classification and systematization of information available on the Internet

Context

E-Search • General search - Google.com - Bing.com • Special search - ListenNotes.com - ...

E-Catalogs • Web directories/lists - Yellowpages.com - Sharelook.co.uk - ...

E-Bookmarking • Social tagging - Curlie.org - Tagpacker.com - Mendeley.com - ...

• Meta search - Dogpile.com - ... • Desktop search - Spotlight - Windows Search - GMX Search for Windows - ...

Fig. 10.15 The context business model. Source: Wirtz (2001a, 2020b)

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Context

351

The use of context offers has been increasing for years. Google, for instance, processes more than 3.5 billion search queries per day (Internet live stats 2020). Context providers in the digital business sector can be further distinguished in that they primarily do not offer their own content but rather offer navigation aids and increasingly take on the role of an aggregator on the Internet. Consequently, users often set a context page as their homepage through which they can access information, interaction, or transaction offers of other providers. In addition to providing essential navigation aids, complexity reduction is also a major task of the context provider. The context provider compiles information according to specific criteria and clearly presents it to the user in a context-specific manner. The objective is to improve market transparency and to continuously enhance the obtained search results (Evans and Wurster 1999). The e-search business model represents Internet search engines, including general search, special search, meta search, and desktop search. The basic function of a search engine refers to the information retrieval system. A search engine user submits a search query to the search provider and obtains search results of the index-based inventory of the collected information sorted according to the frequency of use of other users. In contrast, web directories as well as the offline versions such as the yellow pages are in most cases subject to editorial control and provide a better average quality or relevance of search queries than traditional search engines. However, many web directories offer positions of the entries in the catalog against payment, which in turn weakens the relevance aspect. In addition, web directories cannot offer users the extensive information a search engine can provide. For instance, ShareLook, a web directory operating in eleven European countries, holds about 250,000 entries ready for query (ShareLook 2020), while at the same time, search engines easily allow more than 30 million hits depending on the search query. Bookmarking, as a further subcategory in the context sector of the business model, has only gained high importance due to the developments within the scope of the Web 2.0. E-bookmarking describes the collaborative indexing of Internetbased information by users. Users can assign keywords in web browsers by means of Web 2.0 applications, so that other users with similar search queries can find the information faster. This type of indexing is particular successful with respect to welldefined user groups since the information can be efficiently filtered according to the relevance of the target group. Furthermore, the decentralized storage of bookmarks facilitates usage independent from private devices. After having presented the different types of business models in the framework of context business models, the following explains the aggregated context value chain. The subsequent sections address the specific core competencies and core assets of context providers and specify the particular service offers.

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The Context Value Chain The different partial models of a general business model are implicitly taken into account when looking at the aggregated value chain of the context provider. Here, it is important to note that the value chain is particularly valid for the first two types of context business models and that e-bookmarking differs from this superior value chain in some aspects. Figure 10.16 illustrates the components of the context value chain.

Operation of Server • Hardware • Software

Search Software/ Algorithm • Reliability of search results • Amount of data included • Differentiation/ objective

Sale of Advertising Forms • Keyword advertising • placement

Presentation/ Contextualization • Relevance • Integration of advertising • Cross-linking

Marketing/ Billing • Data mining • Cross-selling • Cost per click/ performance • After sales

Fig. 10.16 Aggregated value chain of the context business model. Source: Wirtz (2001a, 2020b)

The value chain of a context provider highly depends on the operated hardware and software. Here, especially the server structures are important to efficiently process the incoming search queries and to perform the other processes of the value chain. Figure 10.17 depicts the server structure of a search engine provider (content based on Barroso et al. 2003).

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Fig. 10.17 Server structure and interaction for a search query. Source: Wirtz (2001a, 2020b)

Ad Server

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The user sends a search query to the web server that then communicates with the spell check server, checking whether the entered search terms are orthographically correct or whether suggestions for improvement need to be sent out. At the same time, the search term is redirected to the different index servers that assign document identification numbers (doc IDs) to the search term, which are already known from earlier sent queries. The web server in turn sends these doc IDs to the document server that finally delivers the index-based documents corresponding to the search query to the web server and ultimately to the user. Another particularly important server for the other value chain processes is the ad server that delivers context-specific advertising for the search query (Barroso et al. 2003; Laudon and Traver 2020). Moreover, the applied software with regard to the servers or their update is very important for the context provider. While in the case of web catalogs and tagging people actively take part in the indexing process, the most common search engines like Google or Bing use software robots (softbots) that take care of the indexing (Turban and Volonino 2010; Chaffey et al. 2019). These softbots periodically scan the documents available on the Internet and match these with the different relevant servers, checking whether substantial changes have emerged. Only this elaborate maintenance of the data structure and the index enables an efficient search query with current search results. Closely connected to the server operation is the second value chain stage: the search software or search algorithm. In this connection, one can focus on different elements of value creation that are described in the following. One of the most important requirements of the success of a context provider is the reliability of the search software applied. Here, the system needs to recognize every term entered by the user in the search box and back it with results as quickly as possible. In this connection, there are different functions available for the algorithm, which one can use to perform a reliable search, for instance, Boolean operators, phrase search, and exact matching. The amount of data included also represents an important performance aspect of a context provider. A search algorithm must be able to distinguish clearly the information desired by the user. For instance, if a user requests specific documents in a specific file type, the algorithm needs to be able to directly deliver these documents. As opposed to this, in the case of free text searching, there is no specific limitation of the database. Here, it becomes apparent that search engines increasingly present search results from different areas to the user. This integrated search feature offers the user an additional benefit that the context provider can use to improve the index for search queries. Figure 10.18 illustrates a free text search with the search engine Google and the integrated result from a comprehensive database. Google displays both general results and results from the image search. If necessary, the user can isolate or select specific data areas via the menu bar below the search box.

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Context

355

Fig. 10.18 Integrated search result of the search engine Google. Source: Google (2020b)

The narrowing down of the data areas is also important with regard to the aim or differentiation of search engines, which is why a context provider needs to consider this aspect in the creation of value. While Google provides an integrated offer of search results and represents a general interest search engine, Technorati, for instance, has established itself as a search engine specifically for weblogs. Thus, users only find publications in weblogs and primarily no commercial offers or websites. The already mentioned ad server is a significant source of revenue within the scope of context business models. In this connection, there generally exist various forms of advertising of which keyword advertising and placement are regarded as most important (Gay et al. 2007). Keyword advertising is a context-specific form of advertising that provides suitable advertising to a search query (Turban et al. 2018). The ad server matches the search query to the available advertising options and provides a selection of various advertisements. This type of advertising offers the advertising company a variety of benefits. The advertisement only appears when a potential customer searches for a related search term, making it very likely that the user perceives the displayed advertisement as relevant.

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Moreover the commonly used compensation method in the context of keyword advertising is pay-per-click which means that the advertising company only has to pay for those advertisements that the users have effectively clicked on. The costs per click depend greatly on the selected keyword because competition drives the bid price. For instance, in the case of a very frequently searched keywordthere will be higher competition among advertisers which thus increases the price of the clicked ad. Within the scope of value creation, there arises differentiation potential for the context provider and opportunities to achieve a price premium in the sale of keywords. Besides keyword advertising that mainly occurs in conjunction with search engines, placement as another form of advertising has established particularly in the context of web directories. In this case, links and offers of advertising companies are integrated into the offer of the web directory. In this connection, context providers have two basic selling opportunities for the advertisement. The provider of the web directory cannot only charge a fee for considering the inclusion of a company into the index (pay for consideration) but also for the inclusion itself (pay for inclusion) (Gay et al. 2007). Beyond the sale of advertising forms, the presentation and contextualization of search results represent stages of value creation. In this connection, the relevance of the search results plays a significant role because the users link the added value of a search engine to those hits or results that are relevant to them. Here, the links on the website or of the documents to other websites or documents are highly important. To determine the relevance of the search results, Google uses the page rank algorithm that indicates how many links exist between qualitative websites (Chaffey et al. 2019). This assessment of relevance enables the context providers to increase their revenue through the display of keyword ads. Within the scope of the contextualization of search queries, cross-linking is also possible to own offers of a context provider. In this way, most search engines that, for instance, also offer email services and video platforms integrate these services into the search results and provide the user a direct opportunity to use their services. The value chain of a context provider ends with numerous marketing tasks and billing services for delivered advertising services. There are several ways for the context provider to handle the billing. The search engine Google, for example, provides for the context-specific advertising AdWords multiple payment options depending on the region. For instance, the payment can be made subsequently, meaning that the due cost-per-click total can be debited from a credit card or bank account. Alternatively, companies can also make an advance payment to Google to have better cost control with regard to the context-specific advertising. Google only advertises as long as the respective companies have credit in their accounts. In the context of marketing, a context provider must increasingly draw on the variety of data generated by the search queries (Turban et al. 2013). Targeted data mining allows a context provider, for instance, to identify different trends and make relevant companies aware of them. This marketing directly targets the sale of advertising to these companies. Furthermore, data mining is also particularly relevant in the after-sales area. Companies that place context-specific advertising obtain very detailed statistics with regard to the respective ads and user behavior. Finally, cross-selling is also important for context providers. Figure 10.19 shows a section of the Google AdWords portal.

10.4

Context

357 Description of functions

Summary

Fig. 10.19 AdWords and cross-selling on Google. Source: Google (2020d)

Context Core Assets and Core Competencies The core assets of context providers are manifold and include, especially in the case of search engine providers, the hardware and software (particularly the search algorithm), the data, as well as the brand. The web directories expand these core assets by the relationship network. Finally, the user base is a significant core asset particularly for e-bookmarking business models in order to be able to collaboratively create the indices. The following describes the entirety of these core assets, before dealing with the necessary core competencies. The hardware, in other words, the servers used by the context providers, represents an important core asset. Here, the time it takes for a server to process the incoming user requests is particularly critical for success. Google’s success, for instance, originates from the use of simple and selfdesigned special servers, which, although having an increased energy demand, can manage search queries particularly fast (Google 2020a). Through this special type of server, Google has created a special core asset toward its competitors since the concrete use of technology is company-specific, although it can be bought in the market. The situation is similar with the software or search algorithm. While the general search algorithms such as Google’s page rank or trust rank algorithm are publicly known, the search engine’s algorithm used in everyday business is secret. Google, for example, uses a search algorithm based on the page rank algorithm, which it has meanwhile enriched by further data volumes and thus greatly improved (Google 2020e). Another important core asset for context providers is data. The data available on the Internet is basically available for the providers in the same way. The provider that best matches the available amounts of data with its own database and is able to smoothly integrate self-generated data develops a particularly strong core asset.

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An example of such a core asset is again the search engine Google. In addition to the constant alignment of the database with the data available on the Internet, Google itself generates data to provide the user with even better results. In this context, Fig. 10.20 shows Google’s service Street View.

Street View

Small map

Navigation

Fig. 10.20 Google Street View. Source: Google (2020g)

Google collects data worldwide in the form of digital photographs of known buildings or major cities and integrates them into its own database of Google Maps. The data obtained by Google represent a particularly unique core asset in this context, which is difficult to imitate. However, when it comes to integration and generation of data, negative effects may also occur. For example, users have increasingly expressed their fear in the public debate that one provider concentrates too much data, which may potentially lead to data abuse. The brand of a context provider can generally be considered a core asset, since it is particularly associated with the reliability and relevance of search results. However, the example of Google Street View shows that a brand may also suffer when public debates arise regarding data security or data usage and users lose confidence in the brand. Overall, however, current surveys on search engine usage show that Google is the clear market leader in search engines and user confidence is hardly limited despite the public debate on data security (Statista 2019c, 2020k). Although it is also important for search engines to develop and maintain cooperation partnerships, this aspect is rather a core asset for web directories. Web directories present the various links of cooperation partners in a clear way and thus provide a guide for the user. If a web directory provider has established a network of partners that work exclusively through the web directory’s offer, this

10.4

Context

359

relationship network may develop into a core asset. The competing web directories will have difficulties in accessing these partners and imitation is hardly possible. Finally, the user or customer base is also relevant for all context providers. In e-bookmarking business models, the user base is an important core asset in order to provide the service to the user at all. Here, the users actively perform the task of indexing the relevant documents on the Internet, thus providing a list of results for specific search queries. The larger the user base of an e-bookmarking provider is, the more likely it is that the indexing provides the proper results in the context of a search query and as a result, in turn, that new users may be attracted. Core competencies of a company are necessary to successfully use and develop core assets. In this connection, context providers particularly need to be competent with regard to the listing and structuring, service and CRM, as well as security. The identification and presentation of relevant results for a search query is realized through the listing and structuring competence. Context providers that have strong skills in this area can provide users a special benefit and thus build long-term relationships with users. Here, the listing and structuring competence traces particularly back to the hardware and software used for the search and delivery of results. Moreover, the structuring competence is particularly important in the context of advertising. Here, the ability to optimally structure and place the contextspecific forms of advertising in accordance with the desired search results is critical for success. Another important capability of context providers is their service and CRM competence. With regard to the users, this is particularly relevant for success of the advertising company. For users, a context provider must offer a special search service that is characterized by a simple and intuitive user interface and delivers structured results. In most cases, search engine providers can only achieve reuse of their search engine among users when the latter are satisfied with the search results. Alternatively, search engine providers can integrate their search engine into different browser types by means of add-ons. In addition to the general service and CRM competence, a context provider needs to have special skills with regard to business customers in order to be successful in the long term. The holistic service, as shown in the AdWords example, is a special benefit for companies. The context provider has to constantly monitor the companies’ needs and precisely analyze or anticipate market trends. Furthermore, a pronounced CRM capability is necessary to bind business customers in the long term. For example, web directories offer business customers a detailed analysis of user behavior and thus the opportunity to better position their offers (Turban and Volonino 2010). Finally, a core competence of context providers is the ability to safely handle the available data. Both users and business customers leave data with the provider through search entries or the placement of context-specific forms of advertising. The provider can use the data for data mining purposes in order to generate better search results for future search queries and to offer companies much better direct marketing potential. However, if the data is not sufficiently protected and data

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breaches occur, a context provider will quickly lose the trust of the stakeholders and thus the chance of long-term success. The next sections describe the service offer of the context business models e-search, e-catalogs, and e-bookmarking. These explanations address the peculiarities and specifics of each individual business model to deliver a practical understanding of the offer. In this connection, special emphasis is put on the search engines that are particularly relevant compared to the other types of business models (i.e., e-catalogs and e-bookmarking), which will be discussed only briefly.

E-Search Search engines are computer systems that automatically search millions of documents according to predefined search terms. Certain programs (softbots) sort these documents into a database that is updated regularly. When a user enters a search query, this term is not searched on the Internet but in the database (Papazoglou and Ribbers 2006). In this context, one can divide search engine providers into general search, special search, meta search, and desktop search. Desktop search can offer a major advantage in competition for users, as well as for search inquiries and related ad revenue. As it provides a preliminary entry point for users before they even open their browser, the integration of a digital search system right on the desktop is a comparative advantage, and search engines such as GMX Search for Windows are trying to capture this space. Desktop search providers may differ in terms of their service offer. While GMX Search for Windows is an entry point on the desktop for Internet search, other services such as Apple’s Spotlight or Microsoft’s Windows Search not only provide Internet search from the desktop but also query the system of the device in use for entered search terms, including documents, emails, pictures, etc., thus entailing also traditional elements of desktop search. The functional principle of the search engines described remains identical in most cases. The most popular search engines, such as Google, Bing, or Yahoo, are called primary or general search engines because the user searches for general information, which the selected search engine often provides directly. These general search engines are most important on the Internet as a whole. The integration into partner deals has also significantly contributed to the distribution of these search engines. For instance, the social networking platform Myspace offers the opportunity to search through the large number of user profiles, videos, or photos directly on their homepage. However, this search is not carried out by Myspace but rather by the general search provider Google. The integration of search engines in other offers expands the circle of users and increases the information quality of the search results.

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Context

361

Special search engines are characterized by a certain focus and only scan previously defined areas of the Internet (Turban et al. 2018). One example is ListenNotes. com that specializes in the collection and search of podcasts (audio files). Meta search engines can be viewed as a subset of original search engines. They link several general or special search engines (Gay et al. 2007). Since no search engine alone can cover the entire Internet, meta search engines forward each request to several of the most important search services. This approach offers the user greater coverage and can be particularly useful with regard to relatively rare search terms. However, the quality of the search results may be lower when using different algorithms than when using primary search engines. A well-known meta search engine is Dogpile.com, for example. Each search query of a user is sent to the integrated search engines Google and Yahoo, which in turn prepare the search result specifically for Dogpile.com. Companies with an e-search business model can use both direct and indirect revenue models, all of which are located in the area of advertising. In particular, contextual advertising with keywords represents a direct revenue model because search engine providers are paid for every click of the users. At the same time, most meta search engines also take advantage of the opportunity of indirect revenue models through advertising. In this context, banners and display ads are the most frequently used forms of advertising. The annual report of Google shows how important the advertisingrelated revenues for search engines are. In 2019, Google’s ad revenue worldwide amounted to 134.81 billion USD (Statista 2020a). Looking at Google’s total revenue worldwide of 160.74 billion USD (Statista 2020b) in 2019 reveals that about 84% of the total turnover is generated through advertising, while the rest of the revenue comes from licensing agreements and other revenue sources.

E-Catalogs E-catalogs are address directories that are mostly subject to editorial control. Editors usually evaluate the quality of a website before it is classified into a structured keyword catalog. Users can then search the directory for keywords or categories to find commercial entries (Papazoglou and Ribbers 2006). In the context of commercial web catalogs, the editorial control has been repeatedly subject to criticism largely due to the revenue models of the web catalogs. Some web catalogs charge a fee for an offer to be considered at all (pay for consideration). This fee can amount to several hundred or thousand dollars and is thus a high market entry barrier for start-ups and small companies. Furthermore, web catalogs charge a fee for including an offer in the index (pay for inclusion) (Gay et al. 2007). As a result, financially strong companies can influence the positioning of their own links, so that the users of the web catalog can rarely find alternative offers.

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Due to the criticism of the approach of many web catalog providers and the development of the Web 2.0 or social media, more and more user-managed web catalogs or web listings have become increasingly prevalent. Here, a large number of users carry out the editorial work who do not pursue commercial interests. An example of a cooperative and user-managed web catalog is the Open Directory Project Curlie (www.curlie.org), derived from the open-source idea, where all users can simultaneously be active actors. The use and editing of this platform is completely free of charge. The offer of Tagpacker (www.tagpacker.com) pursues a similar user-oriented strategy, according to which users can assign keywords (tags) to all kinds of content, thus creating a web catalog. This direct, social classification or indexing of content by the users generates well-structured information particularly in the special target groups, which are primarily not driven by commercial interests. In this context, the artificial word “folksonomy” has become established, which is attributed to the creation of a systematization (taxonomy) by the entire folk (folk). The website presents their users current links of other users, which they can easily tag or add to their own bookmarks. In addition to this offer, the users can further choose between the most used links and a search function within the tags of the users. However, the storage of own files requires a free registration at Tagpacker. The context business model is further explained in Section 18.1 using the example of Bing.

10.5

Connection

The connection business model addresses the establishment of options for information exchange in networks (Wirtz 2000c). Thus, the services of the connection business model often enable interaction between actors in digital networks, which would not be possible in the physical world due to the prohibitively high transaction costs or communication barriers. The connections to be established can be technological, commercial, or purely communicative in nature (Wirtz and Becker 2002). Accordingly, the business model type connection is divided into the ideal business model variants intra- and inter-connection. Numerous core assets and core competencies are necessary for these business activities in order to realize a beneficial and competitive offer for customers. In addition to the actual core business model, these are used for further service offering variants as well as the provision of complementary services in order to be able to offer the widest possible range of services from a single source. Hence, a sharp distinction between the individual business model variants is not always possible, but it can nevertheless serve to show the range of activities of Internet companies in an ideal-typical structure. Figure 10.21 shows the connection business model and corresponding subcategories.

10.5

Connection

363 • Creation of the possibility to exchange information in networks

Connection

Intra-Connection • Community - Social Networks - Facebook.com - Snapchat.com - Social Messages - Skype.com - Icq.com - Twitter.com - Customer Exchanges - Flickr.com - Customer Opinion Portal - Yelp.com

Inter-Connection • Fix Connection - Earthlink.net - Sonic.net • M-Connection - Att.com - T-mobile.com • ...

• Mailing Services - Gmail.com • ...

Fig. 10.21 The connection business model. Source: Wirtz (2001a, 2020b)

The intra-connection subcategory of the business model describes the offer of commercial or communication services within the Internet. This includes, for example, the community sector that comprises social networks, social messages, customer exchanges, as well as customer opinion portals. All these subcategories offer users a platform that allows them to establish contact with peers or friends and to share information, knowledge, opinions, or data files digitally. With the development of new Web 2.0 and social media applications, platforms in the social networking category are receiving the most attention and, due to the high level of interest, can record strong growth in user numbers. Besides the business model variant community, mailing services such as gmail. com are another subgroup of intra-connection. Such providers allow users to send email or greeting cards. Mailing services are mainly financed through advertisements attached to sent emails, banner advertising, or the provision of so-called premium accounts with extra features such as increased storage space.

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Providers in the inter-connection subcategory do not offer communication opportunities within the Internet but supply access to physical networks. This includes, for example, the Internet service provider (ISP) that enables technological access to the Internet for customers. While a fixed connection binds the user locally, i.e., there is only a wired dial-in option into the network at a fixed location, the m-connection user is not limited to a specific location and can access the Internet mobile via smartphone from almost everywhere. In the context of physical connectors, direct revenue models dominate, which usually involve transaction-independent setup and/or basic fees as well as transaction-based connections and/or usage fees. Due to the high usage intensity and the related attractiveness as advertising media and transaction agents, companies often also pursue indirect revenue models.

The Connection Value Chain In addition to the relevant aspects of the value-added chain, the connection value chain is also implicitly addressed to the respective partial models of a business model in order to obtain a comprehensive understanding of the characteristic core activities. Figure 10.22 shows the value chain of a prototype connection provider.

Server Operations • Software • Hardware

Network Infrastructure • Extension and maintenance of the network infrastructure • Implementation of new hardware standards (LTE, G5)

• Cooperation with infrastructure partners (e.g., backbone networks)

Marketing/ Sales

Billing

After-Sales Services/ CRM

• Management of physical distribution

• Extension of payment functions

• Customer relationship management

• Continuous increase of brand awareness and brand extension

• Payment processing

• Relief of aftersales services through easyto-use services (e.g., FAQ, chatbots)

• Up-selling of own rate structure to premium rates

• Receivables management • Development and implementation of innovative payment methods

Fig. 10.22 Aggregated value chain of the connection business model. Source: Wirtz (2010b, 2020b)

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At the beginning of the value-added chain are the planning and/or structure of the server resources that are necessary for the operation in order to be able to provide the customer with reliable access to the Internet or the corresponding applications and platforms. In this context, many critical decisions must be made when selecting the appropriate software and hardware components to ensure the quality and availability of the services. Issues such as scalability or load balancing, for example, must be assessed and adequately taken into account in procurement decisions. In addition to the selection of the appropriate hardware and software, the network infrastructure is another essential determinant of value creation. Only a suitable network infrastructure allows to offer the user services in sufficient quality. Particularly for the business model type inter-connection, the expansion and maintenance of the network infrastructure is of great importance in order not to incur strategic disadvantages by using an outdated technology in competition with other providers. Besides the price of the products, the essential differentiation feature of the Internet providers is the actual speed of the Internet connection. If a provider cannot keep pace with competitors in the technological contest, it can give the customer only the maximum achievable (slower) bandwidth of the older technology and thus offer a lower benefit. The construction and expansion or maintenance of a network infrastructure is very costly. It can therefore be useful to work together with infrastructure partners. For example, the two mobile providers O2 and Vodafone entered into a strategic partnership in developing of the UMTS network in order to realize synergy effects and cost savings of around three billion EUR within the scope of this alliance (Delbrouck 2002). However, cooperation with other companies cannot only be useful but in the case of Internet service providers is also imperative in some areas. This is mainly due to the construction of the Internet, which is a worldwide network consisting of many individual computer networks. The Internet service provider (ISP) offers the end customer an access point to this global network. The user dials into the provider by means of a modem and thus establishes a connection. This automatically connects the user to all other users who are currently connected to this provider. In order to enable not only local, but also global, access, Internet service providers have concluded a cooperation agreement. They form their own network and can thereby forward requests globally. After ensuring the technical prerequisites, marketing and sales must ultimately ensure the implementation of the designed service and revenue models. In addition to the usual offline activities, cross-media and online marketing activities can also be carried out in order to attract potential users (Wirtz 2008). If, however, users do not yet have online access or are not technologically active, the offline activities play an essential role. In this context, the traditional distribution channel should be strengthened and the classical distribution points created or expanded against the background of increasing competition. While there are strong network effects in the intra-connection community, this is not the case for inter-connection business model types. Accordingly, the resulting lock-in effects are rather low and a customer is more willing to switch providers to

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pay a lower price for the product or get a higher performance for the same price. In this context, a high brand identity and a high brand expansion capability are of great importance to keep customers and win new customers. For example, Vodafone UK not only offers mere Internet access in connection with their cross-selling and up-selling activities but also enhance the latter with complementary services such as IPTV. Besides the Vodafone brand, Vodafone markets a premium Internet TV offer under the term Now TV Entertainment, in which the customer can receive the TV channel via the Internet and can continue to use special services, such as an online video library. In this context, sales must be managed particularly in order to achieve the desired cross-selling or up-selling in higher-value rate structures with premium offers. This includes, in particular, the coordination of sales channels, pricing and pricing policies, as well as the communication policy in order to acquire users and potential customers. While the margins in the base rate of the Internet service providers are very low and owed to the intense competition, marketing and sales can contribute decisively to the profit increase by focusing on high-quality products in the sales processes. The value-added component of the billing arises directly from sales and deals with the payment systems and receivables management associated with the acquired user contracts. Depending on the type of business model, various forms of payment may be considered. As providers of inter-connection business models typically receive regular payments, they can offer their subscribers direct debit or credit card payment or payment by invoice. In contrast, intra-connection providers usually charge only small or very small amounts, which is why a direct debit payment or payment by invoice is usually not worthwhile because of the high transaction costs (Turban et al. 2018). In this case, micro-payment services such as PayPal appear to be more appropriate due to lower transaction fees. Furthermore, the development and implementation of innovative payment methods needs to be promoted in order to make pay-per-use offerings more convenient and thus to sustainably increase the revenues generated from there. The last step of the value chain of the connection business model type focuses on customer relationship management and the after-sales service. Through active customer care as well as a consistent focus on the customer and the systematic design of customer relationship processes, companies seek to satisfy customers and bind them to their brand and products/services. This can be achieved by documenting as much information as possible from the communication with the customer and clearly by assigning it to the respective customer. In this context, the customer should be offered the best possible service at reasonable cost. The after-sales service plays an important role in this connection. In the initial phase of the customer relationship, the after-sales service has to provide advice and assistance to the customers, as problems can often occur with regard to the installation of new Internet connections or the corresponding devices. However, to ensure that the after-sales service is not contacted for trivial inquiries, the company can provide the customer with a range of “easy-to-use” services. The after-sales service is supported and relieved, for example, by frequently asked

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questions (FAQs) on the website, since the customer can independently find the solution to well-known problems (Wirtz 2011b). After having presented the value chain of a connection provider, the following describes the underlying core assets and core competencies that a connection provider requires in order to successfully and sustainably compete in the Internet market.

Connection Core Assets and Core Competencies The most important core assets of connection providers are the network infrastructure and the underlying IT platforms. In addition, the employees responsible for this can be regarded as a core asset, since these specialists are required for the reliable operation of the servers or networks. Moreover, the brand and the customer or user base are among the core assets of connection providers. The network infrastructure is an important core asset, especially for the interconnection provider, since this is the only way to establish a smooth, permanent connection to the Internet. For example, Deutsche Telekom had a long-term monopoly in the provision of Internet access. Today, Deutsche Telekom’s competitors have somewhat mobilized the market and are thus eroding the core asset of Deutsche Telekom, but the downtime and network problems among the competitors are still higher than those of Deutsche Telekom. In addition, this core asset is also increasingly threatened by alternative connection standards, such as cable providers or mobile access technologies. Similar to the network infrastructure necessary for Internet service providers, the IT platforms of the other connection business models represent a potential core asset. A community operator must ensure, for example, that the user platform always permits perfect operation. Generally, this also includes the loading times of the platform, as well as the minimization of necessary updates or restructuring measures. If a provider manages the necessary IT platforms efficiently without restricting the user, the IT platform can be understood as a core asset of the provider. Closely linked to this core asset are the employees of the connection providers. These are key factors in the efficient operation of the platform and must ensure that, in addition to the technical components, any emerging problems with or among users are addressed as quickly as possible. In particular, the customer service plays an important role in the context of inter-connection providers. This varies significantly between providers. However, it is also important in the context of intra-connection that unauthorized access to an email or chat profile, for instance, is recognized and remedied by the employees as quickly as possible. All these measures lead the users or customers to trust the provider, thus resulting in long-term customer loyalty. This trust is also clearly visible toward the brand of the connection provider. As with other business model variants of the 4C-net business model, the brand represents a value proposition and is associated with certain product properties by the customer. While the brand names of the well-known Internet service providers are also partly associated with a poorly developed service policy, it is particularly

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evident in the context of the community providers that the brand plays a decisive role in determining whether the platform as a whole is trusted. For example, Facebook has been increasingly criticized because users were not satisfied with different data protection regulations. As a result, fewer users have registered on Facebook or existing users have deleted sensitive data from their profiles. A further aspect to be associated with the brand as a core asset refers to network effects. As soon as a brand has established itself in the community area, the growing number of users also increases awareness, which, in turn, increases the brand value. Thus, the customer or user base also holds a core asset function. Not only through the positive network effects, for example, in the context of further recommendations, but also through the total number of active users, a platform or a service becomes interesting to other users. For example, the actively participating users on the Myspace community platform are a core asset, since they increasingly provide self-generated content that other users receive. The passive recipients may be encouraged to become active and thus also a core asset of the provider. Besides the important core assets, core competencies are also required to maximize the potential of the core assets for the providers. Within the scope of connection providers, the technology and integration competence and the customer acquisition and customer loyalty competence are essential. The technology and integration competence is of particular importance to all connection providers. In addition to ensuring the described smooth Internet access and platform access (technology competence), the use of different access technologies (integration competence) is also highly relevant in this context. For example, well-known Internet service providers have already been offering so-called bundling offers that offer customers several ways to access and become active on the Internet. In the context of customer acquisition and customer loyalty competence, the focus is on employees’ abilities. In the case of inter-connection providers, customer acquisition is linked with a classic sales competence that enables to acquire new customers or to use up-selling potentials. Within the context of customer loyalty, Internet service providers also have online and offline CRM measures at their disposal. The customer acquisition competence is different with regard to interconnection providers. There is no direct customer acquisition in the case of community or mailing offers. Instead, here providers seek to acquire customers by means of indirect references to the service or referral marketing. For example, Google offers an invitation service to the users of its email service, according to which users can invite friends or acquaintances to use Gmail. Figure 10.23 summarizes the core assets and core competencies of connection providers.

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Competitive Advantage

Core Assets

Core Competencies

• Network infrastructure

• Technology competence

• IT platform

• Integration competence

• Employees

• Customer acquisition

• Sales structure

• Customer loyalty

• Brands • Customer or user base and respective data

Fig. 10.23 Core assets and competencies of a connection provider. Source: Wirtz (2010b, 2020b)

The service offers of the intra- and inter-connection business model variants as business models of the connection type are further specified in the following. Their characteristics and particularities will be discussed as a connection business model. Furthermore, current practical examples are used for illustration purposes.

Intra-Connection The intra-connection business model types provide commercial and/or communicative services within the Internet. As already mentioned, within this business model type, a distinction can be drawn between the community area and mailing services. In this context, the community area can be further differentiated into the sub-business models social networks, social messages, customer exchanges, and customer opinion portals. Social networks have achieved a special prominence through the developments in the context of Web 2.0 and social media (Wirtz et al. 2014). The most common social networks for the predominantly private sphere are Facebook and Baidu. The LinkedIn platform is a network for more professional profiles in a more serious environment. However, the service of the platforms is usually very much the same (Wirtz and Ullrich 2008). The user is allowed to create his or her own profile and release various content, such as photos, music, or a CV. For some networks, such as LinkedIn or Myspace, it is possible to make the created profiles public for non-members, so that they can be found by search engines. Another important aspect of social networks is the networking idea,

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which means that users connect with other users and thus form an interaction and communication structure (Gangadharbatla 2008; Valenzuela et al. 2009). This interaction and communication structure is mainly due to the active participation of users in these networks. The platforms draw a large portion of their offer to the users from the contributions or the general content that the registered users provide. In this context, trust, the sense of belonging, and the urge to selfpresentation are responsible for the very high activity on the platforms. All these elements are also evident in the mission of the Facebook platform, which until 2017 was: “Giving people the power to share and make the world more open and connected” and was then changed to “give the people the power to build communities and bring the world together” (Johnson 2017). Social messaging providers also offer services similar to those of social networks. However, these do not focus on content generation or linking as in the Facebook example but rather on communicative aspects. While in the early days of the Internet chats were particularly important with regard to interactive communication, this trend has changed significantly to private chats or messenger services. The most widely used services in this context are Skype and WhatsApp. Both services offer the user a secure, private connection with friends and acquaintances, in order to communicate via text messages and Internet telephony, as well as to exchange data. A similar, but more public, service is offered by Twitter. Twitter allows to send short messages to the platform and thus to other users of the platform to discuss current topics or to publish updates of everyday life (“microblogging”). An intra-connection service offer, which in many cases is associated with the illegal use of the Internet for sharing data of all kinds, is the customer exchange platform. One of the largest networks in this sector is the platform Mega. Mega offers a one-click file-hosting service that promotes a particularly high data transfer speed, allowing data to be distributed quickly and securely throughout the world. Furthermore, the company distinguishes between a free and a premium account. The free account is available to any user after registration and is limited to 50 gigabytes in terms of data transmission services. The premium account, in contrast, enables an increased data transfer volume of up to 16 terabytes. There had been an increasing number of illegal downloads and uploads in the past, which led to the original platform Megaupload being shut down by the FBI in 2012 (Fowler et al. 2012). Customer exchange platforms, which on the whole increasingly focus on private and thus copyright-free content, are Flickr and Google Photos, for instance. These providers offer users storage space on the Internet, in particular, to exchange or link photos or videos. These companies also offer a free service and a premium account. The free account is again limited in terms of the amount of data, while premium accounts offer a choice of different data volumes. The last variant of the intra-connection sub-models are the customer opinion portals. The developments in the context of Web 2.0 and social media have also generated a special growth effect in this business model variant. Due to the increased public communication of the Web 2.0 users and the associated public opinion formation, opinion portals are particularly important since Internet users as a

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whole might trust the contributions of other Internet users more than the official company information (Bailey 2005). The offers of the platforms are primarily aimed at customer value. In addition to general product descriptions, the key product reviews and evaluations are core components of the service offer. This multimedia-based product description, which is sometimes several pages long, allows potential buyers to get a detailed overview of the desired product and to make the purchase decision with greater certainty. For the reviewers, the customer opinion portals provide different incentives to continue to produce product reviews. For example, the provider yelp.com, which also offers commerce aspects such as price comparisons, gives registered reviewers the opportunity to receive scores for evaluations that reflect a status within the community. The more product reviews the user has created and the more useful these reviews are classified by the user community, the more points the user receives. The provider also grants financial incentives, which are rather symbolic given the maximum amount of one Euro. The business model mailing includes classic email services that have changed in the past few years, in particular, due to the increase in storage capacity. The functionality and performance of most email accounts have remained the same. Users can send messages in letter form to other email addresses for free. However, many email providers tend to integrate email services with other Web 2.0 or social media applications. Examples are Gmail and Microsoft Outlook. While classic emails comprise only a few kilobytes, the transmission of videos and images has also become increasingly established through the dynamic development of the broadband Internet. Due to the increase in the size of the email attachments, the storage capacity of most mailboxes has also increased. For example, Microsoft Outlook and Gmail offer 15 gigabytes of free storage space now (Microsoft 2020; Google 2020f).

Inter-Connection The business model variant inter-connection is divided into the two types: fixed and mobile connection. However, a clear differentiation is not always possible, especially with regard to large telecommunication providers. O2 and Vodafone, for instance, offer fixed connection as well as m-connection services. Overall, there is a trend toward product bundling for inter-connection providers, and the connection to the Internet is implemented in several ways (Schilke and Wirtz 2012). These service packages, also known as triple play, combine, for example, telephone, Internet, and television services. In the extended version of quadruple play, this bundle of services is extended by a mobile offering, which finally blurs the boundaries between fixed and m-connection. In addition to the large all-round providers, there is also a large number of smaller inter-connection companies in

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the United Kingdom that focus on specific services such as media and mobile prepaid services. While traditional telecommunications companies are increasingly building on technical networks such as ISDN and DSL, smaller providers especially Virgin Media use the cable network to offer telephone and Internet services. When using this connection technology, the companies can then be unambiguously assigned to the fixed connection type. Within the framework of the pure m-connection providers, a considerable variety is to be found, although the actual service offer of the m-connection companies, i.e., the connection of the customer with the mobile Internet, is identical in total. However, it is generally possible to distinguish between a few mobile telephone providers with their own networks, such as Vodafone or O2, and pure service providers that use these networks for their service. At the same time, there is a large number of service providers in the m-connection segment in the United Kingdom. Figure 10.24 shows an overview of the m-connection market in the United Kingdom. There are only four mobile host networks to which the individual service providers are assigned to.

M-Connection Providers in the UK

O2

EE

Three

Vodafone

• 1pMobile

• Anywhere Sim

• Anywhere Sim

• Anywhere Sim

• Champions Mobile

• FreedomPop

• Anywhere Care Ownfone

• Asda Mobile

• Fonome Mobile

• Gamma Telecom

• Anywhere Sim

• Auracall Travel Talk

• giffgaff

• iD Mobile

• Jump

• Axis Telecom

• Jump

• Jump

• Lebara Mobile

• BT

• KC Mobile

• Pebble Mobile

• Pebble Mobile

• CTExcel

• Lycamobile

• Rok Mobile

• Talkmobile

• Ecotalk

• Pebble Mobile

• RWG Mobile

•…

• Jump

• Tesco Mobile

• Pebble Mobile

• Truphone

• Shebang (PG Mobile)

• Virgin Mobile

•…

• Telfoni

• White Calling

•…

•…

Fig. 10.24 M-connection providers in the United Kingdom. Source: Wirtz (2019) and own analysis and estimations

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LinkedIn is a successful company with a connection business model. A case study on LinkedIn can be found in Section 18.1.

10.6

Hybrid Business Models

In the initial phase of digital business development, Internet companies pursued business models in their pure form as shown in the 4C-net business model. In the further development of the Internet, however, these pure unifunctional business models usually turned out to be too focused in the long run. For this reason, other aspects of business model variants have successively complemented them, making them increasingly hybrid and multifunctional.

Drivers for Developing Hybrid Business Models There are four reasons for developing hybrid business models: inter-connection effects, multiple customer loyalty, price bundling, and diversification of revenue sources. These are presented below. Economies of scope can be used by companies in the Internet economy above all by making offers not only from the core business but also from related business areas (cross-selling). The traffic generated on the original website can also be used for offers from other business areas. A large customer base is an important core asset for all business models in the Internet economy, as it allows economies of scale and the realization of network effects. The special importance of economies of scale in the context of the Internet economy results from the cost structure of information products and digitizable goods. These are characterized by very high fixed costs and relatively low variable costs. The higher the fixed costs in relation to the variable costs, the higher the unit cost reduction with increasing sales volume. Accordingly, the dominant supplier’s unit costs fall faster than those of its competitors when sales volumes increase, thus giving it the opportunity to realize higher profits or to increase its market share even further by reducing prices. An expansion of market share in turn leads to an increase in sales volume, which further intensifies the unit cost reduction and thus opens up further scope for price reductions. Network effects also explain the high importance of a large customer base in the Internet economy. They describe external effects that arise in networks due to an increasing number of users. External effects or externalities are defined as positive and negative effects of individual consumption or production acts in which the originator is not compensated (positive effects) or charged (negative effects) via

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the market. Network externalities are thus the effects of the participation of one person on a network to the other participants of this network. As a rule, network externalities are positive. As the number of participants in a network increases, so does the benefit for the individual participant. At the same time, this increases the incentive for new users to join the network, creating a cycle that increases revenues. However, positive feedback from one network is also associated with negative feedback from other networks. When the benefits of a network diminish due to a decreasing number of subscribers, leaving the network becomes more and more attractive for the individual subscriber: “Positive feedback makes the strong grow stronger [. . .] and the weak grow weaker!” (Shapiro and Varian 1999, p. 174). Multiple customer retention is a further aspect of hybrid digital business models. The concept refers to customer retention on several business model levels. Thus, acquiring and retaining customers takes place based on more than one business model offer, increasing the number of relations to the customers. The resulting multiple customer retention on different levels fosters customer loyalty (Wirtz 2001b). In the case of connected or networked forms of customer relationships, the barrier to customer exit (lock-in phenomenon) is comparatively much higher than in the case of a single business relationship. For example, an Internet company can achieve a customer retention effect or a lock-in effect for the customer due to increased switching costs by additionally offering products from the intra-connection segment. Lock-in effects thus describe the fact that customers who have invested in the integration of an asset are bound to the associated system. They are based on the switching costs that arise when a customer decides to switch to another system or good. The higher the costs incurred when changing systems, the more the customer is bound to the system (Shapiro and Varian 1999). Another way to increase switching costs and generate lock-in effects is to provide one-stop interfaces. One-stop interfaces give the user access to different service offerings and/or business models via a standardized interface. In this way, a multiple customer relationship is established, which offers the user different services via a system that the user is familiar with. If the user of a one-stop interface intends to change the provider for one or more of the services offered, the switching costs increase in the case of multiple customer retention, since the user was able to access different services conveniently via one interface using the previous system. By creating hybrid business models, companies also have the opportunity to combine various individual services into service bundles. This not only results in advantages in terms of customer benefit as a result of reduced search costs and convenience benefits but also creates the possibility of tapping additional profit potential by introducing a bundle price for a service bundle (Wirtz 2011b). Price bundling allows to reduce the heterogeneity of demand through the transfer of the

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consumer’s surplus and in this way to take advantage of consumers’ willingness to pay more. Similarly, process automation leads to a shift from offline to online costs. Since the cost structure of digital services is usually characterized by high fix costs and low variable costs, this results in a significant advantage in the case of a high number of performance units. As soon as the fixed costs are covered, the company benefits disproportionately from each additional service unit (compared to traditional, analog service provision). Since unit costs decrease incrementally with an increasing number of service units, companies with digital services benefit more from economies of scale. The major part of fixed costs in the digitization of services arises at the initial installation. The digitization of other services is usually less cost-intensive, since they can be based on the initial installation or often only represent an extension. Therefore, the bundling potential increases with the size/bandwidth of the digital service offering and the number of digital services offered. The fourth reason for expanding into different or new business areas refers to diversification and exploitation of new revenue streams. Diversification reduces the overall risk of a revenue stream, given that the different revenue streams do not correlate completely. The economic basis can therefore be strengthened by combining, adapting, and aggregating the basic business models into a hybrid, multifunctional business model (Wirtz 1999). The necessity of diversification becomes particularly apparent against the backdrop of the high complexity and dynamic within the Internet economy. This results in developments that are difficult for market players to monitor and assess (qualitatively and quantitatively) and which can influence the success of individual business models. Consequently, there is a considerable potential for uncertainty regarding the opportunities and risks for individual business models, the unsystematic risk of which should be diversified as far as possible. Besides diversification, another reason for the expansion into new business areas is the development of new sources of revenue. In the past, it has been shown that advertising as the only source of revenue for most companies on the Internet is not sufficient to survive in the long term. The integration of new revenue models and streams (multi-revenue streaming) into the existing business model thus broadens the revenue stream and might secure the existence of a company. The pursuit of hybrid business models can therefore be interpreted, on the one hand, as a form of risk diversification and, on the other, as a way of tapping new sources of revenue. Figure 10.25 summarizes the described aspects that lead to a hybridization of business models on the Internet.

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Drivers for Developing Hybrid Business Models

Economies of Scope • Economies of scale to expand service provision • Network effects to strengthen the customer base

Multiple Customer Retention • User loyalty and retention across different business model levels • Lock-in effects through high system change costs

Price Bundling

• Reduction of search cost and effort • Convenience benefit

Diversification of Revenue Streams • Risk minimization • Multi-revenue streaming

• Shift from offline to online costs through automatization

• One-stop interface

Fig. 10.25 Reasons for the development of hybrid business models. Source: Wirtz (2001a, 2020b)

A very prominent example of a hybrid business model is the business model of Google/Alphabet. Google started as a search engine provider, becoming a market leader and expanding its business model to the 4Cs and beyond. The case of Google/ Alphabet is explained in detail in Chapter 17.

10.7

Summary

• A company’s business model is closely related to competitive advantage and organizational success. • The partial business models form a framework that consists of three components: the strategic component, the customer demand component, and the value creation component. These three components consolidate the business strategy, leading to a more detailed and overarching business model that still provides the advantage of reducing the complexity of reality. • Revenue streams of digital business companies can be either direct or indirect plus they are either transaction-based or transaction-independent. An important decision of digital business companies is therefore the combination and weighting of revenue streams in order to optimize outcomes. • Using the service offering of digital businesses as differentiation criterion, the business models of the Internet industry in the B2C sector can be classified into content, commerce, context, and connection. This business model typology is called the 4C-net business model. • The aim of the content business model approach is to make content accessible to users online in an easy, convenient, and visually appealing way. A distinction can be made between the subcategories e-information, e-education and e-entertainment, as well as e-infotainment.

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Summary

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• The commerce business model is a service business model that entails the initiation, negotiation, and usually also the settlement of transactions via the Internet. It aims to substitute traditional phases of transaction. Subcategories of the commerce business model are e-attraction, e-bargaining/e-negotiation, e-transaction, and e-tailing. • The context business model deals with the classification and systematization of information available on the Internet and can be subdivided into search engines, web directories, and bookmarking services. The use of context offers has been increasing for years, making Google one of the most important online services, with a dominant market position. • The connection business model offers services that enable the interaction of actors in digital networks which often would not be possible in the physical world due to the prohibitively high transaction costs or communication barriers. It is characterized by network effects. • Regarding the connection business model, a distinction can be made between intra-connection and inter-connection business models. The intra-connection business model types provide commercial or communicative services online, whereas inter-connection business model types provide either a fixed or mobile connection to the Internet. • Digital businesses are increasingly pursuing hybrid business models that focus on more than one business model. Drivers for this development are economies of scope and scale, network effects, multiple customer retention, price bundling, and the advantages of diversified revenue streams. Hybrid business models have the potential of being very attractive for customers and minimizing the risk for digital business companies.

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Chapter 10 Questions and topics for discussion

Review questions 1. Which partial models make up business models in digital business? 2. Present the revenue model system of digital business schematically and briefly discuss the different relevance of the individual forms of revenue. 3. Present the different basic business model types of the 4C-net business model. 4. Describe the components of the value chain of the commerce business model. 5. Describe the connection business model, differentiating between intraconnection and inter-connection.

Topics for classroom discussion and team debates 1. Discuss the advantages and disadvantages of specialized business models (1C). Are integrated models (2C, 3C or 4C) perhaps more reasonable for the free market economy and customer benefit? (onestop shopping) 2. Discuss the future of the content business model - will digital media lead to the complete dissolution of traditional media (newspapers, magazines, television, ...)?

3. Discuss the advantages and disadvantages of the context business model. To what extent does Google's dominant position in the search engine market entail risks for our society and the free market economy?

Digital B2B Business Models

11

Contents 11.1

11.2

11.3

11.4

11.5

Digital B2B Sourcing Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subcategories of the Service Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of an Aggregated Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital B2B Sales Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subcategories of the Service Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of an Aggregated Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital B2B Supportive Collaboration Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subcategories of the Service Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of an Aggregated Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital B2B Service Broker Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subcategories of the Service Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of an Aggregated Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Assets and Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

381 382 383 383 384 385 386 387 388 389 389 390 391 392 393 393 394

Learning Objectives By working through this chapter, you will be able to: 1. Understand the difference between digital B2B and B2C models and know the model types of the 4S-net business model. 2. Know the characteristics of the digital B2B sourcing business model and describe the relevant subcategories. 3. Describe the digital B2B sales business model and clarify the corresponding aggregated value chain. 4. Name the subcategories of the digital B2B supportive collaboration business model and identify appropriate examples. 5. Explain the digital B2B service broker business model and describe the respective core assets as well as the core competencies. # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_11

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Business models not only have a high relevance in the B2C sector, but especially in the B2B sector, various business models have been successfully established.1 The main difference lies in the underlying relationship. While B2C business models are characterized by a range of services for private end users (private customers), B2B business models focus exclusively on business relationships between companies. Based on the procedure for deriving B2C business models through differentiation by means of the individual value chains and service offerings, four basic digital B2B business models can be derived for the B2B sector: sourcing, sales, support collaboration, and service broker. This business model typology is referred to in the following as the 4S-net business model and represents the most relevant B2B business models on the Internet. However, in the context of B2B business model typology, it must be taken into account that a rigid and clear demarcation is not always possible in an environment characterized by high pressure for change and adaptation, such as the Internet. For example, a company may have a core business model, but it may have certain similarities with other B2B business model groups. Figure 11.1 shows the 4S-net business model. Section 11.1 deals with the digital B2B sourcing business model and addresses the initiation and/or settlement of B2B business transactions. The digital B2B sales business model is described in Section 11.2 and deals with direct business transactions of sales through the Internet. Section 11.3 then describes with the digital B2B supportive collaboration business model and focuses on collaborative value creation. Finally, Section 11.4 discusses the digital B2B service broker business model, which also includes third-party providers and intermediaries.

Sourcing

Sales

• Initiation and/or

• Initiation and/or

• Settlement of direct B2B business transactions from buyer to seller

• Settlement of business transactions from seller to buyer

Supportive Collaboration

Service Broker

• Supporting collaborative value generation

• Support of B2B business transactions

• Collaborative research and development

• Providing information and marketplaces of third parties

• Collaborative production • Collaborative sale

Fig. 11.1 4S-net business model. Source: Wirtz (2010b), Wirtz and Bronnenmayer (2011)

1

See for the following chapter also Wirtz (2019, 2020).

11.1

Digital B2B Sourcing Business Model

381

The four B2B business model types of the 4S-net business model are described in the following. Therefore, each business model type including the most relevant subcategories of the service offering is first presented before an aggregated value chain is specifically developed. Finally, the most relevant core assets and core competencies for the individual business model types are explained.

11.1

Digital B2B Sourcing Business Model

The B2B sourcing model consists of the initiation and/or settlement of B2B business transactions from buyer to seller. The aim of this business model is to handle business transactions of procurement management by means of the Internet (Camarinha-Matos et al. 2013). A direct service relationship between buyer and seller is required. Figure 11.2 illustrates the sourcing business model with the two approaches: private B2B exchange (one-to-one) and buy-side B2B exchange (one-to-many).

• Initiation and/or • Settlement of direct B2B business transactions from buyer to seller

Sourcing

Private B2B-Exchange (One To One) • Extranet/EDI - NEC - Dell - IBM - …

Buy Side B2B-Exchange (One To Many) • Buy side digital marketplace - General Motors - Siemens - … • Intranet - Intel - …

Fig. 11.2 B2B sourcing business model. Source: Wirtz (2010b, 2020b)

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Subcategories of the Service Offering For buyers it is not only crucial that traded products and services are supplied quickly, reliably, and in the usual quality but also that they are able to react flexibly to changes in demand. Moreover, B2B exchanges are mostly set up for frequent purchasing. The setup of a private B2B exchange is usually not worthwhile for individualized services with low repurchasing rates. In practice, such strategically important one-to-one relationships with vendors or suppliers are mostly established through appropriate extranets. The company intranet is extended to include interactive procurement support components, which can only be accessed by the exclusive strategic partner (one-to-one). Such private B2B exchanges are widely used in the B2B digital business area, for example, by companies such as NEC, Dell, or IBM to support intensive supplier relationships. An established and proven alternative to the one-to-one extranet is the digital data interchange (EDI). It allows sending a procurement order to the supplier immediately, reliably, and accurately, as the order in the system is predefined by the supplier. The Internet increasingly serves as a platform for existing EDI systems. The EDI data are then transmitted by using email or FTP services (Internet EDI). In addition to the clear cost advantages compared to traditional methods of information exchange regarding procurement (e.g., fax or voice mail) and the straightforward and unified process management, the establishment of a private B2B exchange solution generally leads to long-term relationships between customers and suppliers. However, if the respective business link collapses, the established system is usually also not used for other purposes, which is why it represents sunk costs for the company. Unlike the private B2B exchange, the buy-side B2B exchange is characterized by a one-to-many relationship between the buying companies and other vendors or suppliers. Buying companies can implement such supplier relationships by establishing a buy-side digital marketplace. In this context, the purchasing company builds a digital marketplace on their own server and invites different suppliers to quote on open supply requests. This variant often follows reverse auctions that are used to choose the one supplier with the cheapest quotation (request for quotation) (Rayport and Jaworski 2001; Turban et al. 2015). Since constructing and operating a digital marketplace requires considerable resources, only major corporations such as General Motors or Siemens usually use this type of buy-side B2B exchange. An alternative version of the buy-side B2B exchange is to build a multi-supplier catalog (Camarinha-Matos et al. 2013). Individual supplier catalogs merge into one comprehensive catalog and are stored on the intranet of the company procured. The technical integration into the internal financial or ordering system and into the application system of the supplier makes it relatively easy to trigger and process orders. In practice, such multi-supplier catalogs are widely used across different industries.

11.1

Digital B2B Sourcing Business Model

383

Development of an Aggregated Value Chain Having introduced the sourcing business model with its main subcategories, the following section will discuss the ideal-typical value chain and the main core assets and core competencies of the sourcing business model. The aggregated value chain of the sourcing business model consists of five main stages. In the stage of demand planning, one has to specify the items that need to be acquired for the production process and determine the quantity of the items needed. Before the actual delivery of goods and the payment processing can take place, the order needs to be officially initiated and assigned to the respective suppliers. Figure 11.3 illustrates the aggregated value chain of the sourcing business model.

Demand Planning • Specification of needed items • Quantity of needed items

Provider Search • Search for potential providers • Contacting potential providers

Provider/Product Selection

• Selection of providers • Selection of products

Order • Order purchasing • Order transmission

Order Processing

• Receipt • Invoice verification • Payment processing

Fig. 11.3 Aggregated value chain of the sourcing business model. Source: Wirtz (2010b, 2020b)

Core Assets and Core Competencies Core assets and core competencies are very important for the success of companies. The most important core assets of the sourcing business model are the procurement system, a large supplier network, and the IT platform applied. An integrated procurement system allows companies to efficiently organize their procurement processes and optimize the procurement process by minimizing delivery times and process costs (Papazoglou and Ribbers 2011). Moreover, it is important to have a large and well-positioned supplier network in order to be able to compare individual supplier or delivery conditions and negotiate the best possible procurement conditions (Jelassi and Enders 2008). The technical realization takes place by means of an IT platform that is particularly adapted to the needs of the respective company. The core competencies of the sourcing business model include highly developed procurement know-how and negotiation skills. In addition, highly developed data processing skills are particularly useful because the procurement systems usually have to deal with a huge amount of data. Figure 11.4 summarizes the core assets and the core competencies of the sourcing business model.

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Competitive Advantage

Core Assets

• Integrated procurement system • Provider-network • IT platform

Core Competencies • Buying-know-how • Negotiation skills • Data processing skills

Fig. 11.4 Core assets and core competencies of the sourcing business model. Source: Wirtz (2010b, 2020b)

11.2

Digital B2B Sales Business Model

The B2B sales business model involves the initiation and the settlement of direct B2B business transactions from the seller to the buyer. The aim of this business model is to handle transactions of sales through the Internet but initiated by the seller. Unlike the source model, here the selling entity initiates the direct relationship between buyers and sellers (Rayport and Sviokla 1995). Accordingly, one can derive the following subcategories: private B2B sales and sell-side B2B exchange. Figure 11.5 illustrates the B2B sales business model.

11.2

Digital B2B Sales Business Model

385

• Initiation and/or • Settlement of direct B2B business transactions from seller to buyer

Sales

Private B2B-Sale (One To One) • Extranet - Cisco - Roche - …

Sell-Side B2B-Exchange (One To Many) • Sell-side digital marketplace - Microsoft - Bosch - … • B2B-storefront - Hertz.com - Stapleslink.com - …

Fig. 11.5 B2B sales business model. Source: Wirtz (2010b, 2020b)

Subcategories of the Service Offering Analog to the private B2B exchange of the sourcing business model, the private B2B sales model describes a one-to-one relationship between the seller and buyer (Timmers 1999). However, unlike the B2B exchange, the focus of attention is not the procuring company but rather the supplying companies (sellers). Thus, the B2B seller seeks to establish a long-term intensive business relationship with its major customers (usually measured in terms of turnover). For the purposes of the intended long-term customer loyalty, it is advisable to support such businesses by establishing appropriate technical extranets and to agree to individualized terms of products and respective pricing for each major corporate customer. In practice, such private B2B sales are now widely used. Sellers, for example, are manufacturing companies that sell their products exclusively to a wholesaler or retailer. Companies that successfully apply such private B2B sales models are, for example, Cisco or Roche. In contrast, the sell-side B2B exchange stands for a direct one-to-many relationship between the seller and buyer (direct selling). Thus, a sellside B2B exchange always involves one B2B seller and several potential B2B buyers (Papazoglou and Ribbers 2011). An intermediate stage, for example, in the form of an intermediary is not considered at this point but rather as part of the business model type service broker.

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Sell-side B2B exchanges consist of sell-side digital marketplaces and B2B storefronts. A sell-side digital marketplace is a web-based market platform that offers a seller’s products or services to a number of potential business customers. The seller himself usually operates the marketplace platform and implements it in the form of an extranet (Camarinha-Matos et al. 2013). Two models exist: digital catalogs and digital auctions. Microsoft, for instance, uses the direct sale via a digital catalog based on the extranet system and successfully achieves software sales with various channel partners (Turban et al. 2018). Large and well-known companies can also establish their own digital auctioning system in order to achieve a respective number of sales without involving intermediaries. However, considering the technical infrastructure and maintenance, such platforms are significant in terms of cost. Companies that successfully operate their own digital catalogs are usually limited in implementing such digital auctioning system. A disadvantage of running own sales platforms is that intermediaries often have a broader customer base and thus more potential bidders than those that can be addressed with the company’s internal operations (McIvor and Humphreys 2004). B2B storefronts represent a modification or development of the sell-side digital marketplaces. The main difference is that B2B storefronts are technically not realized by establishing an extranet but rather by programming a general webpage (Turban et al. 2015). Companies have to register and obtain a company ID and password to ensure that only selected business users can access the online platform. Stapleslink.com is a good example in this context. This approach has the advantage that new B2B customers easily access the storefront. In addition, the use of individual business profiles can be explicitly adapted to the wishes and needs of each business customer, and agreed product or price conditions can be aligned with the storefront (e.g., business account program by Hertz). In the following, the ideal-typical value chain and the essential core assets and core competencies of the sales business model are discussed.

Development of an Aggregated Value Chain The aggregated value chain of the sales business model consists of five main stages. In the stage of key account management, companies first need to identify the existing and relevant customer segments in the market. Based on this, they can then select the customer segments that are supposed to be addressed and build the respective sales platform according to the pursued customer relationship strategy (private B2B exchange or sell-side B2B exchange). The successful setup of the sales platform provides the basis for digital order processing and the subsequent delivery of goods or provision of services. After the delivery of goods or service provision, the billing takes place in terms of classic invoicing or by means of electronic bank transfer or direct debit. Finally, companies can use after-sales management to increase customer loyalty (Wirtz and Olderog 2002; Gierl and Gehrke 2004). Figure 11.6 illustrates the aggregated value chain of the sales business model.

11.2

Digital B2B Sales Business Model

Key-AccountManagement • Analysis of customer segments • Selection of customer segments

ChannelRelationship • Customer relationship management • Building the salesplatform

387

Sales Processing • Order processing • Delivery of good, provision of services

Billing • Classical invoicing practice • Electronical transferal, direct debit

After-Sales Management • Customer loyalty • Service, maintenance • After-sales support

Fig. 11.6 Aggregated value chain of the sales business model. Source: Wirtz (2010b, 2020b)

Core Assets and Core Competencies The most important core assets of the sales business model include a large and wellestablished customer base as well as the development of a broad key account network to strengthen the bargaining power and establish a popular brand. In addition, the applied distribution structure and IT platform is also an essential core asset. Depending on the sales strategy, it is particularly important to select the most economic type of sales business model and realize it by means of an appropriate IT platform. For example, it is advisable to establish an extranet (one-to-one) to build sales business relationships with strategically important key accounts. In order to provide simultaneous access to the sales platform for more than one business customer, one can establish a sell-side B2B exchange (Turban et al. 2018). The core competencies of the sales business model include good negotiation and pricing skills. Since the technical setup and operation of the above-mentioned variants of the sales business model is not carried out by third parties but on the selling company’s own responsibility, this aspect can also be seen as further core competence. The implementation of an own sell-side digital marketplace requires fundamental IT knowledge within the company that can be either internally developed within the company or externally acquired from the market. Figure 11.7 summarizes the core assets and the core competencies of the sales business model.

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Competitive Advantage

Core Competencies

Core Assets

• • • • •

Customer base Key account network Branding Distribution structure IT platform

• Negotiation skills • Pricing skills • Installation and establishment of technical infrastructure

Fig. 11.7 Core assets and core competencies of the sales business model. Source: Wirtz (2010b, 2020b)

11.3

Digital B2B Supportive Collaboration Business Model

The B2B supportive collaboration business model consists of collaborative value creation and comprises the areas of collaborative R&D, collaborative production, and collaborative sales. Thus, the focus of attention is the joint value creation of several companies in the areas of research and development, production, and sales. The companies involved have a direct relationship to each other. An intermediary is usually not involved. Before describing the individual components, aggregated value chains, and core assets of the supportive collaboration business model, Fig. 11.8 shows an overview of the supportive collaboration business model. • Support of collaborative value generation • Collaborative R&D • Collaborative production • Collaborative sale

Supportive Collaboration

Collaborative R&D • Network innovations - Automotive sector - Telecommunication sector - Pharmaceuticals - ...

Collaborative Production • Partner networks - Sony - BMW - ...

Collaborative Sale • Consortium trading exchange - GHX.com - Staralliance.com - ...

Fig. 11.8 B2B supportive collaboration business model. Source: Wirtz (2010b, 2020b)

11.3

Digital B2B Supportive Collaboration Business Model

389

Subcategories of the Service Offering The subcategory collaborative R&D refers to the joint development of new products or service offerings that are usually realized by establishing an appropriate corporate network (network innovation). Such innovative networks not only are a widespread approach to use the company’s capacities in a joint effort but also help to develop uncertain ventures, for instance, in connection with modern digital business techniques in the automotive or pharmaceutical industry. General Motors’ computer-aided design program, for instance, provides 3D design documents of prototypes online to designers and engineers. In addition, there is also the possibility of flexible connection via web conferencing tools in order to support cross-company teamwork cost-effectively. The second subcategory of the supportive collaboration business model is collaborative production. The aim of collaborative production is a joint production of goods and services, supported by the use of digital business technologies (Turban et al. 2018). In this context, an integrated supply chain of various partner networks is also a collaborative production approach. The aim of such partner networks is to optimize the production processes, for example, by means of just-in-time production and by integrating suppliers in the production process. The use of material requirement planning systems, for instance, makes it possible to plan the production process precisely and to manage demand or scheduling (Papazoglou and Ribbers 2011; Laudon and Traver 2020). Such collaborative production processes are used in corporate structures, predominantly in the manufacturing sector by companies such as Sony or BMW. The final subcategory of the supportive collaboration business model is collaborative sales. The collaborative sales business model describes the practice of several industry players that establish a common sales exchange platform and operate it cooperatively. In this context, no further intermediary is involved. In practice, collaborative sales constellations are usually established by means of a consortium that offers a trading exchange (many-to-many) (GHX 2010). The company GHX, for instance, is a pioneer in this field for the healthcare industry. GHX was founded in the year 2000 by several major manufacturers of medical products and is now the world’s largest trading exchange company in the healthcare sector. In the following, the ideal value chain and the essential core assets and core competencies of the supportive collaboration business model are discussed.

Development of an Aggregated Value Chain The aggregated value chain of the supportive collaboration business model consists of five main stages. In the stage of collaboration planning, the value chain is examined for collaboration potential. Based on this, potential collaboration partners can be identified and general conditions can be clarified within the pre-contract negotiations (collaboration partnering). The concrete negotiation and specification of the collaboration contract including the definition of the distribution-of-business plan takes place in the context of collaboration scheduling. The next stage is the collaboration fulfillment in which the

390

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Digital B2B Business Models

previously defined collaboration is realized including the setup of the IT platform. Finally, the efficiency of the collaboration is ensured by means of a respective collaboration audit including the determination of improvement measures. Figure 11.9 illustrates the aggregated value chain of the supportive collaboration business model

Collaboration Planning • Analysis of value chain regarding collaboration potential

Collaboration Partnering • Identification and selection of potential collaboration partners • Contacting and contract negotations

Collaboration Scheduling • Negotiation of contact conditions • Definition of distribution-ofbusiness plan • Conclusion of collaboration contract

Collaboration Fulfillment • Collaboration contract fulfillment • Execution of defined collaboration • Setup of ITplatform

Collaboration Audit • Examination of collaboratioin fulfillment • Performancemeasurement of collaboration and initiation of improvement measures

Fig. 11.9 Aggregated value chain of the supportive collaboration business model. Source: Wirtz (2010b, 2020b)

Core Assets and Core Competencies The most important core assets of the supportive collaboration business model include an IT platform that is adapted to the individual needs of the respective actors and a collaboration network that is required to establish long-term cooperation. Moreover, an efficient and target-oriented allocation of collaboration resources is necessary in order to use synergetic effects efficiently (Wirtz 2010b). One of the most important competencies in the supportive collaboration business model is the negotiation competence in order to conduct negotiations in an efficient and effective manner. In addition, collaborative companies also need to have a cooperation competence and a highly developed integration competence in order to use supportive collaborations efficiently. Figure 11.10 summarizes the core assets and core competencies of the supportive collaboration business model.

Competitive Advantage

Core Assets

• Collaboration network • Distribution of collaboration resources • IT-platform

Core Competencies • Negotiation skills • Cooperation skills • Integration skills

Fig. 11.10 Core assets and core competencies of the supportive collaboration business model. Source: Wirtz (2010b, 2020b)

11.4

11.4

Digital B2B Service Broker Business Model

391

Digital B2B Service Broker Business Model

The B2B service broker business model supports B2B business transactions by providing information and marketplaces (Weill and Vitale 2013). Unlike the rest of the 4S-net business model, this model involves third-party providers or intermediaries. Thus, there is no direct relationship between the companies that eventually make deals and conduct transactions. Instead, they are only connected to each other via the corresponding intermediary. The B2B service broker business model comprises the categories of digital information and digital marketplaces. Figure 11.11 presents the business model of service broker and its related subcategories.

• Support of B2B business transactions through • Provision of information and marketplaces of third parties

Service Broker

Digital Information • Digital directories - Thomasnet.com - Manufacturing.net - Dnb.com - B2btoday.com - …

Digital Marketplaces • Digital exchanges - Agentrics.com - ice.com - … • Digital auctions - Business.ebay.com - Asset-auctions.com - …

Fig. 11.11 B2B service broker business model. Source: Wirtz (2010b, 2020b)

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Digital B2B Business Models

Subcategories of the Service Offering The subcategory digital information describes the provision of pure business information portals. Valuable business information, such as product directories, retailer overviews, as well as general or specific market information or industrial information, is provided to respective business clients. A trading exchange function between buyers and sellers is not available, as the service is limited to selling information. Digital directories such as Thomasnet.com offer a large online database of companies by segment, product/service, or location and thus offer easy search options to manufacturers, wholesalers, or service providers (ThomasNet 2020). Other information portals, such as dnb.com, do not focus on linking buying companies and suppliers but provide company profiles including financial data of over 120 million companies in order to assess the liquidity of a business partner, for instance (D&B 2020). Unlike digital information, digital marketplaces do not only offer information but also access to products and services. A digital marketplace is a digital trading exchange operated by intermediary companies to match potential sellers and buyers. Unlike the previously described sell-side- or buy-side-operated B2B exchanges, the independent digital marketplaces are usually publicly available to companies. Interested companies (buyers and sellers) meet on a common digital platform to trade goods and services (many-to-many). The most frequently used types of digital marketplaces are digital exchanges and digital auctions that will be discussed in more detail below. A digital exchange involves offers from different product or service providers that are compiled and standardized by an intermediary company and then presented on a central platform to potential buyers (Sila 2013, 2015). These digital exchange platforms do not only present the products or services but also act as supporting intermediaries for the transaction process between buyers and sellers, for instance, by providing special trading rooms and support services for the payment transaction. A successful digital exchange requires a large scope of the IT platform and appropriate advertising, especially on the supply side. Digital auctions are a special form of digital exchanges and a frequently used tool in the B2B sector. While an ordinary digital exchange lists products with fixed price tags, digital auctions are subject to dynamic pricing. The bidder with the highest bid is usually successful. However, there are different forms of auctions that can be applied such as supplier-side bidding in which the seller with the lowest price gets the contract. In the context of digital marketplaces, digital auctions can be used in two different ways: either integrated into digital exchanges in the form of private trading rooms or as a stand-alone business model. The best known operator of digital auctions as an independent business model in the B2C sector is eBay. Nowadays, eBay is not only active in the B2C sector but also provides B2B customers with an auction platform specially designed for this purpose. In the following, the ideal-typical value chain and the essential core assets and core competencies of the service broker business model will be discussed.

11.4

Digital B2B Service Broker Business Model

393

Development of an Aggregated Value Chain The aggregated value chain of the service broker business model consists of five main stages. In the stage of conception and design, the service broker determines the services that are supposed to be offered and the customers that are supposed to be addressed by these services. Based on this, the service broker can start with the setup and maintenance of the IT platform and acquire the content needed. For a digital information provider, this means collecting or producing the information that is necessary for the planned conception. For a digital marketplace provider, this is about acquiring product or service offers that are supposed to be distributed via its platform. In the next stage, the service broker seeks to acquire customers by means of target group-specific marketing activities and finally provides the service to the customers. The following stage of billing contains payment handling and receivables management. The most important aspect with regard to the after-sales service refers to data mining that enables companies to analyze and, at best, anticipate customer needs. Figure 11.12 illustrates the aggregated value chain of the service broker business model.

Conception/Design

• Service determination • Target group definition

Content Acquistion and Platform Setup • Collection of information, acquisition of offers • Coding and setup of IT-platform

Marketing/ Distribution • Customer acquisition • Target group specific marketing • Service provision

Billing

• Payment handling • Receivables management

After-Sales Service

• Customer relationship management • Customer data management

Fig. 11.12 Aggregated value chain of the service broker business model. Source: Wirtz (2010b, 2020b)

Core Assets and Core Competencies The most important core assets of the service broker business model are the provided service broker content, the customized IT platform, and particularly the customer base. The attractiveness of a digital marketplace, for instance, results from the number of visitors and thus the potential customer base of the digital marketplace. The higher the number of registered users of a marketplace platform, the higher the reach and hence the purchase probability (Wirtz 2010b). Establishing and cultivating a brand further supports this development. A good reputation positively influences the value of the created content, which in turn can also be seen as a core asset. Finally, it is particularly important for service brokers in the B2B area to establish and cultivate industry-specific networks in order to gain a differentiation or cost advantage over their competitors.

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Besides the setup and operation of the technical infrastructure, the most important core competencies of the service broker business model are particularly the competencies with regard to the product range design and customer acquisition or retention. This can be understood as the ability to present or categorize relevant products and services to the customer in an appealing way and to bind the customer to the company in the long term by means of CRM measures. This ability is essential for establishing and extending a critical customer base because the switching costs among providers on the Internet are particularly low. Figure 11.13 summarizes the core assets and core competencies of the service broker business model.

Competitive Advantage

Core Assets

• • • • •

Customer base Content Brand Networks IT-platform

Core Competencies • Product range design • Customer acquisition and retention • Setup and operation of technical infrastructure

Fig. 11.13 Core assets and core competencies of the service broker business model. Source: Wirtz (2010b, 2020b)

11.5

Summary

• Business models have been successfully established within the economy, especially in the B2B sector, whereby the main difference to the B2C sector is the exclusive focus on business relationships between companies. • The 4S-net business model presents the most important digital B2B business model. However, a rigid and clear demarcation cannot always be achieved in a constantly changing environment such as the Internet and is therefore subject to ongoing change and adaptation. • The digital B2B sourcing business model consists of the initiation and/or processing of B2B business transactions from the buyer to the seller and aims at processing business transactions of procurement management via the Internet. Therefore two approaches are considered: private B2B exchange (one-to-one) and buy-side B2B exchange (one-to-many).

11.5

Summary

395

• The aggregated value chain of the digital sourcing business model consists of five main stages: demand planning, provider search, provider/product selection, order, and order processing. The most important core assets of the digital sourcing business model include a procurement system, a large supplier network, and the IT platform. • The digital B2B sales business model includes the initiation and processing of direct B2B business transactions from the seller to the buyer and aims at processing sales transactions via the Internet. In contrast to the sourcing business model, the sales business model is initiated by the seller. The aggregated value chain consists of five main stages: key account management, channel relationship, sales processing, billing, and after-sales management. • The core competencies of the digital sales business model include good negotiation and pricing competencies as well as the installation and establishment of the technical infrastructure, as this technical setup and operation is performed in-house. • The digital B2B supportive collaboration business model focuses on collaborative value creation and includes collaborative R&D, collaborative production, and collaborative sales. The aggregated value chain consists of five main stages: collaboration planning, collaboration partnering, collaboration scheduling, collaboration fulfillment, and collaboration audit. • The most important core assets of the business model of supportive collaboration include a collaboration network, the distribution of collaboration resources, and a suitable IT platform designed for long-term cooperation. Core competencies comprise negotiation skills, cooperation skills, and integration skills. • The digital B2B service broker business model supports B2B business transactions by providing information and marketplaces involving third parties or intermediaries. The model includes the categories digital information and digital marketplaces. While digital information describes the provision of pure business information portals, digital marketplaces also offer and provide access to products and services. • The most important core assets of the service broker business model are the provided service broker content, the customized IT platform, and particularly the customer base. The core competencies of the service broker business model are product range design, customer acquisition and retention, as well as the setup and operation of the technical infrastructure.

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Chapter 11 Questions and topics for discussion

Review questions 1. Describe the 4S-net business model in the B2B sector. 2. Explain the four aggregated value chains of the respective digital B2B business models. 3. Summarize the core assets of each of the four digital B2B business models. 4. Describe the core competencies of all four digital B2B business models. 5. Name significant company examples of the four basic models of the 4S-net business model and assign these examples.

Topics for classroom discussion and team debates 1. Discuss the relevance of digital business models in the B2B sector, especially with regard to the digital transformation of the economy in view of the shift from offline to online business. 2. Discuss the main differences between the 4C- and 4S-net business model. Explain where the B2B and B2C relationships differ within the digital context. 3. Discuss to what extent the B2B examples from the digital world with which you are familiar are covered by the 4S-net business model or name examples of companies that comprise several of the basic 4S-net business models.

Part III Digital Strategy, Digital Organization and E-commerce

Digital Business Strategy

12

Contents 12.1

12.2

12.3

Four Forces of Digital Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Product and Service Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Unit Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sector Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deregulation of Information, Media, and Communications Markets . . . . . . . . . . . . . . . . . . . Modifications of User Preferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convergence in Broadband Internet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digitization and Innovation Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in the Speed of Innovation and Open Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Open Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in the Level of Digitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Individualization of Service Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Free Delivery via Digital Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Complexity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in Market Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fragmentation of Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reduction of Market Entry Barriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer Empowerment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reduction of Switching Barriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase of Market Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Value Activity System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITS Front-Office Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSP Back-Office Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategy Development in Digital Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxonomy of Digital Business Strategy Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Target Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Situational Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Strategy Formulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_12

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Digital Business Strategy Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .463 Digital Business Strategy Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467

Learning Objectives By working through this chapter, you will be able to: 1. 2. 3. 4. 5.

Identify and describe the four forces of digital strategy. Explain the determinants of convergence. Distinguish open innovation from other forms of innovation. Classify digital business strategy in the corporate context. Describe the different phases of digital business strategy development.

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Four Forces of Digital Strategy

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The Internet economy and digital business have significantly changed the basic market rules of the traditional economy. At the same time, the requirements for a successful corporate strategy in the Internet economy have changed (Wirtz et al. 2007; Papazoglou and Ribbers 2011). A strategic management that continues to focus exclusively on economic interdependencies, legalities, and environmental assumptions is therefore at risk of diminishing the company’s competitiveness. The increasing diffusion of the Internet economy and digital business thus requires a strategic realignment of market players (Jelassi and Enders 2008; Hackbarth and Kettinger 2000). This realignment of the market must be analyzed in the first place to be able to define success factors for digital business.1 Businesses have to understand the changes the digital revolution has brought about to adapt appropriately and design a respective strategy (Coltman et al. 2001; Jeon et al. 2006). Therefore, Section 12.1 derives a general understanding of the strategic environment in digital business and presents key elements of the strategic environment of digital business. On this basis, the chapter further presents new strategic success factors and options for action in digital business. Apart from that, the new strategic environment does not only pose risks and challenges to businesses but also offers opportunities and new markets. Successful companies use these chances by developing an adequate strategy in their sector. To shed light on this issue, Section 12.2 presents the digital business value activity system (eVAS) that analyzes this strategic value generation in digital business. Finally, Section 12.3 outlines key aspects of the development process of a digital business strategy.

12.1

Four Forces of Digital Strategy

Along with innovations in the area of information and communication technologies, digital business has gained significant importance (Zhu et al. 2006). With boosting processing power, enhanced capacities of computers and networks, as well as increasing demand for electronically provided information and services from customers and businesses, the first electronic service offers began to run in the mid-1990s. As a technology-enabled part of the business model, digital business quickly became a powerful innovation that can provide manifold benefits, since it allows unattended customer access to information and services, improves B2C and B2B interaction, fosters efficiency and effectiveness, and forms the basis of digital markets from a technological point of view (Schneider 2017). Furthermore, its digital platform character for B2B and B2C interaction promotes standardization and thus reflects the demand of customers for more transparency and accountability. Today, digital business is an inherent part of the market worldwide because it is highly relevant in addressing customers’ desires and requirements. In this context, implementing digital business is especially relevant to the economy since the availability of online services is an important factor within global competition

1

See for the following chapter also Wirtz (2020b).

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(Chaffey 2015). The 4-forces model of digital business explains the driving forces behind this situation that requires change for businesses by aggregating relevant drivers to four key developments: convergence, digitization and innovation dynamics, market complexity, and customer empowerment (see Fig. 12.1). An important and strategically relevant development in the Internet economy is the “convergence” of digital business markets. Although all forces are crucial, this is the most significant one, since it covers the fundamental breakthrough of making digital business technologically possible. Convergence describes the approximation of underlying technologies, diminishing boundaries between sectors, networking of different areas of value creation, and finally the integration of sectors, business units, organizations, products, and services (Denger and Wirtz 1995b). From a technological point of view, convergence in the information and communication sector (ICT) describes the merging of existing technologies into new, multifunctional products and services. The boundaries between media, computer, and telecommunication products and services are thus becoming increasingly blurred. The main determinants of this development are digitization, deregulation, and changes in user preferences.

Convergence • Convergence in ICT

• Convergence in the broadband Internet and mobile networking • Technology-driven infrastructure and networking

Digitization and Innovation Dynamic

Customer Empowerment

• Digitization of products and services

• Rising market transparency and accountability • Reduction of switching barriers decreases customer loyalty

Companies

• Rapid product and service developments

• High innovativeness and innovation dynamics

• Connecting customers in social networks and virtual communities

Market Complexity • Rising market transparency and market fragmentation • Decreasing market entry and switching barriers

• Disintermediation

Fig. 12.1 4-forces model of digital business. Source: Wirtz (2000c, 2020b)

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Four Forces of Digital Strategy

403

The second major change in the business environment refers to “digitization and innovation dynamics” and concerns products and services in digital-based markets. On the one hand, a fundamental development toward digitization can be observed. On the other hand, a significant increase in the speed and dynamics of innovation is becoming apparent in the Internet economy. Innovation thus plays a central role in the Internet economy and digital business. The third force refers to increasing “market complexity.” This development is mainly due to increased market transparency and fragmentation caused by the Internet economy, the erosion of barriers to market entry and switching, and a general tendency toward disintermediation. In the traditional economy, markets are generally characterized by a low to medium degree of market transparency. Low market transparency leads to information asymmetries between buyers and sellers who, due to their information advantage and their superior market position in the traditional markets, can set higher prices than in digital markets. The high availability of information in the digital business environment ensures a significantly higher transparency and a better comparability of product and service offerings. Furthermore, it enables an easier access to new sales markets and access to sources of supply that have been difficult to exploit before. The fourth and last relevant development in the context of digital business refers to the “empowerment of customers.” Customers today expect increasing participation in product and service design as well as in the product development process and attach great importance to efficient and effective B2C interaction. In order to meet these expectations, many companies have started to significantly optimize transparency for the customer and the integration of the customer with regard to development, production, and management. As a consequence, they become smart customers and obtain market power (smart customer empowerment). In the following, the four digital business forces identified (convergence, digitization and innovation dynamics, market complexity, and customer empowerment) are described and analyzed in terms of consequences and effects.

Convergence The developments currently taking place in the field of digital business are leading to substantial dynamics in this area. Thus, the markets in which digital business enterprises operate are characterized by increasing convergence. Convergence in the information and communications industry comprises the approximation of underlying technologies, the merging of individual value-added areas from information technology-driven industries, and, ultimately, a convergence of the markets as a whole (Denger and Wirtz 1995b). However, within the convergence field of digital business, different levels of convergence can be observed, depending on the level of aggregation. In addition to convergence at the product/service level, business unit level, and company level, convergence trends can also be identified at the sectoral or industry level. Figure 12.2 illustrates the different levels of convergence together with their associated characteristics.

high

Level of aggregation

Product/service convergence

Business unit convergence

Company convergence

Sector convergence

• Convergence of products/services • Convergence of distribution channels • Convergence of end devices through integration of functionalities

• Product convergence affects various business units of a company or business units of different companies • Chances and risks through coordination and cooperation

• Convergence forces companies to reassess their position within the value chain • Reconfiguration of the value chain leads to the merger of companies’ boundaries

• Convergence of a growing number of companies within the sectors involved finally leads to a convergence of these sectors

12

Fig. 12.2 4-level convergence model. Source: Wirtz (2006, 2020c)

low

404 Digital Business Strategy

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Four Forces of Digital Strategy

405

Product and Service Convergence The digitization of data in conjunction with the possibility of distributing it regardless of time and location without compromising on quality represents the starting point of the convergence of products and services. For example, while music consumption and mobile telephony used to require separate end devices, the technological performance of current mobile phones such as Apple’s popular iPhone are also suitable for playing and purchasing music. The convergence of different functionalities in a new product or service is an indicator of product/service convergence. Another example of product/service convergence is the so-called multiple-play offering. Multiple-play refers to a bundled offer consisting of Internet, telephony, entertainment, and/or mobile communication. In the past, consumers had to choose different providers for all components, which involved a relatively complex selection process and an effort that should not be underestimated. The central advantages of multiple-play offerings are the attractiveness of the product bundle and the price advantages of the overall product compared to the individual products. Multiple play can be divided into double, triple, and quadruple play as well as individual multiple play. Double play is a combined offer of Internet access and telephony. Triple play combines Internet, telephony, and entertainment. Quadruple play also integrates a mobile communication offering, and individual multiple play refers to an individual mix of individual offerings from the areas of Internet, telephony, entertainment, and mobile communications. In this context, complementary convergence is obvious, as telecommunication products (Internet access, voice communication) are enriched with content offerings, to provide added value for the consumer.

Business Unit Convergence When convergence occurs across different business units of a company or business units of different companies, this is called business unit convergence. On the one hand, this allows the realization of economies of scale and scope. On the other hand, innovative products and services can be generated from the different business segments by recombining the performance characteristics of the products and services. The difference to product/service convergence is the greater scope of the affected value-added areas and the coordination of the value-added processes. A typical example is the merger of the Telekom Group’s fixed-network T-Home and mobile communications division T-Mobile into the Telekom Deutschland GmbH in 2010. Approximately 63,000 employees serve 19.2 million fixed-network lines, 13.2 million broadband lines, and 43.1 million mobile customers (Deutsche Telekom AG 2019). The organizational merger enables Telekom Deutschland GmbH to offer fixed-network and mobile communication solutions from a single source to private and business customers. The integration of the previously separate

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business units allows the entire range of multiple-play products and services to be offered on a consistent basis (Deutsche Telekom AG 2019).

Company Convergence If the convergence of formerly separate offerings does not concern business units within a company, but refers to completely different companies, the convergence process may lead to cooperation or even mergers of these formerly separate companies. In this case, one speaks of supplier or company convergence (Pennings and Puranam 2000). One example of company convergence is the merger of Vodafone and Kabel Deutschland in Germany. The company operating under the Vodafone brand combines Vodafone’s mobile network with Kabel Deutschland’s fiber-optic network. The aim of the merger is: “A strong presence as a convergent premium provider under the Vodafone brand—across all channels” (Vodafone 2015).

Sector Convergence Sector convergence in the ICT sector is based on the profound change of the competitive environment through the entry of new market participants. The reason for this situation is the increasing convergence of the media, information technology, and telecommunication sector. However, important in this context is not only the merger of individual value-added areas but also the rapprochement of technologies and markets in general (Baubin and Wirtz 1996). This form of convergence should be seen as the final stage in the convergence process. As a result of sector convergence, value chains and traditional business models are being unbundled or recombined. Such “delaying” leads to the shift or even to the entire elimination of industry boundaries (Krüger 2002). In the specific context of information and technology, convergence refers to the merging of existing technologies into new, multifunctional products and services. The boundaries between media, computer, and telecommunication products are becoming increasingly blurred. This can be seen, for example, in the supplementation of already established print and TV products with new offerings from the Internet and multimedia sector or the convergence of existing offers. There are three essential determinants of convergence: digitization, deregulation, and the change in user preferences (Wirtz 2000e). These determinants and their interrelations are described in Fig. 12.3 (content based on Wirtz 2000e).

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Four Forces of Digital Strategy

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Determinants of convergence Technological innovation

Deregulation of markets

• Digitization • Higher transmission capacity • Intelligent network structures

• New competitors • Cross-sectoral competition • Progressive deregulation

Change in user preferences • Individualization of customer relationships • Systemic solutions • Social networking

Sectoral convergence

Telecommunications

Multimedia convergence sector

Media

Information Technology/ Consumer electronics

Fig. 12.3 Determinants of convergence. Source: Wirtz (2020b)

Technological Innovation Digitization opens up new possibilities for the presentation, storage, and distribution of products. It forms the technological basis for convergence (Rayport and Jaworski 2001). The standardization of previously separate storage media, for example, by storing films, music, and text on hard disks, enables economies of scope that can be exploited in upstream and downstream stages of the value chain. Digitization has also an impact on the technological infrastructure. With the conversion from analog to digital data traffic, different communication networks can be used for data transmission and thus become substitutable for each other. Internet access can now be provided via fixed-line, cable, electricity, and mobile networks as well as satellite and wireless wide-area networks. This will lead to an increase in data transmission performance and capacity as well as the development of new interaction formats.

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Deregulation of Information, Media, and Communications Markets Since the mid-1990s, extensive deregulation can be observed in the United States (introduction of cross-sectoral competition and liberalization of vertical integration rules). In the EU, deregulation efforts, such as the liberalization of the telecommunications sector, have led to the emergence of competitive structures in the information, media, and communications industry. Without these developments, the convergence process would have lacked an appropriate market economy.

Modifications of User Preferences The increasing range of media services has led to a fragmentation of media consumption. Especially young consumers use a variety of different offers to satisfy their information and entertainment needs (Rayport and Jaworski 2001). At the same time, user preferences are shifting toward a personalized and individualized media offering, for example, personalized newspapers such as wsj.com (The Wall Street Journal Online) or personalized Facebook pages. This networking ultimately shows a trend toward systemic solutions by enabling companies to provide integrated information and communication services through function integration and bundle services. A good example of a systemic solution is the integrative offer of iTunes, iPhone, iPod, iPad, etc. Moreover, social networking services are used intensively by almost all users. They enable networking between consumers, companies and customers and also between companies. Examples include Facebook, YouTube, and Xing. The more attractive the platform, the more likely companies can extract usable input from user interactions. These developments significantly change the competitive conditions for enterprises in digital business. As a consequence, technological convergence is leading to a convergence of markets that were previously separated from one another. In the market for communication services, cable network operators, telecommunication companies from the mobile and fixed-network sector, and satellite providers are now competing with each other. In order to differentiate themselves from their competitors, they diversify through integration strategies in the area of content production, which makes them a direct competitor to media companies. In addition, the Internet represents a communication space that differs from others in terms of time and mobility and offers the opportunity to develop completely new business models based on process innovations (Choi et al. 1997). The result of this process leads to the partial integration of individual industries, ultimately resulting in the creation of a new market segment. In this new market segment, new products and services are offered and demanded (Denger and Wirtz 1995a; Baubin and Wirtz 1996). This occurs both on the technological and content level and on the industry level in Internet-related business areas.

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Convergence in Broadband Internet Integration has become one of the most important factors in the broadband Internet market. Competitors’ strategies are clearly influenced by the convergence of different media forms. Simultaneously to technological convergence and increasing networking in the fixed-network sector, a strong trend toward mobile networking has been observed for some time. This is associated with systemic solutions that generate additional customer benefits and convenience through improved interaction and networking opportunities. Examples of the networking or integration of information and communication are the functional integration of Internet services in mobile phones or the combination of mobile and stationary telecommunication products (“fixed-mobile convergence”). The establishment of digital technology in the telecommunications and media sector forms the technological basis of convergence in the broadband Internet market. After all, this technological basis enables the processing of information across sectors. One example of the ubiquitous convergence process is mobile Internet protocol television (IPTV). According to the International Telecommunication Union, IPTV is defined as multimedia services provided over IP-based networks that guarantee a sufficient level of service quality, quality of experience, security, interactivity, and reliability (International Telecommunication Union 2006). Mobile IPTV is therefore a multimedia service available on mobile devices (e.g., smartphones or tablets). The product and service offerings of television and broadband and mobile Internet converge are marketed as mobile IPTV solutions. In this dynamic competitive environment, companies are reacting by splitting (unbundling) and recombining (rebounding) entire value chains (Wirtz 2001b). Previously separate activities such as distribution and production are being replaced by new, Internet-based business models. Other companies are expanding their content base through mergers and are using multiple distribution channels to reach new user groups. In recent years, this development has contributed to a strong and still unfinished restructuring of the competitive landscape in the field of ICT companies.

Digitization and Innovation Dynamics Digital business products and services are significantly influenced by two trends. On the one hand, the dynamics of innovation requires an adjustment of product policy, and, on the other hand, digitization enables new forms of products, services, and organizations that are highly relevant in the digital business sector due to their flexibility and scalability. Both phenomena are described below.

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Increase in the Speed of Innovation and Open Innovation In the course of the digital transformation, the speed of innovation and innovation activities is accelerating. In this context, emerging market dynamics bring about changes in the traditional as well as the digital value constellation. In addition to the high speed of innovation in the digital transformation, open innovation, i.e., the consistent involvement of customers, partners, suppliers, and other stakeholders, is of particular importance. Innovation is a central component of the Internet economy and digital business. Due to the dynamics of changes in the business environment in the Internet economy, it can be observed that innovations of considerable scope occur at ever shorter and increasingly discontinuous intervals. This requires substantial adaptability by companies operating in the market. In such an environment, especially, those companies that have integrated a culture of change in their corporate philosophy have a crucial competitive advantage. The primary starting point of this increasing speed of innovation is technological progress, whereby two essential catalysts for this development can be identified. In this context, the high speed of hardware and software development and the full exploitation of digital technology in social and economic areas are two important catalysts. This dynamic in the field of microprocessors is described by entrepreneur Gordon Moore in 1965 with Moore’s Law. Moore established the law that the development of integrated circuits doubles every year. His assertion is based on observations of the semiconductor industry at that time. Moore later revised this forecast by doubling the period to two years. An examination of hardware development shows that in the recent past, an exponential development in the area of processor performance can still be observed. The dynamics of digital systems is shown in Fig. 12.4 (content based on Picot 2000; Wirtz 2013a; Rupp 2015; Moring et al. 2018; Roser 2018; OurWorldinData 2017). This technological development has led to completely new forms and possibilities of information processing, making it possible to collect, store, and process ever larger amounts of data. This effect is further enhanced by the wider installed base of computer hardware. The potential that can be tapped in the area of research and development is thus subject to dynamic expansion. This effect is reinforced by the inter-connection of the world. Prior to the spread of digital networks, the entire knowledge of mankind was not available in a structured form, so that development work was not necessarily based on the latest state of research. Thanks to digital networks and digital storage media, knowledge is globally available, so that developments can be dedicated to something fundamentally new. One example of this type of research is the decoding of the human genome. The groups conducting research in this field—essentially the Human Genome Project (HGP)—have published all their results in a database on the Internet, making them freely available to enable digital collaboration.

Intel 8080

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Intel 8086

Intel 80386

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Intel i960 ARM 3

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AMD Barton

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AMD K10

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Intel Core i7 (Quad) Apple A7 (dual-core ARM64 „mobile SoC“)

IBM Power 6 Intel Dual-Core Itanium 2

32-core AMD GC2 IPU

18-core Epyc Xbox One Xeon 61-core main SoC Haswell-E5 Xeon Phi

Intel 8-core Xeon Nehalem-EX Intel 4-core Itanium Tukwila

Intel Itanium with 9MB cache

AMD K7 AMD K6 AMD K5

Fig. 12.4 Performance of microprocessors. Source: Wirtz (2013a, 2020b)

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The aim here was to avoid duplication of work, to present results to other researchers, and to complete the project as quickly as possible. This approach enabled the successful completion of the project in 2003. Eric Lander, genetic researcher at the Whitehead Institute in Cambridge, summarized the advantages of publishing on the Internet for research: “Eighteen months ago, only 15 percent of the genome was available. If you were studying a disease then, the odds were very good that the correct (gene) sequence was not available. But now, for whatever project you’re working on, the sequence is likely to be freely available on the World Wide Web” (Herald Times Online 2000). This quotation illustrates that it is possible to exploit the potential for specialization in the research, development, and science sector. In this way, the value-added process can be divided into individual sub-processes, which are handled by the most suitable specialists. Regarding the further extension of the Human Genome Project, future research of DNA will be divided among various specialists. In addition, digital networks will be used to enable a “process that never sleeps,” so that a process or a task can be carried out around the globe. This enables continuous progress without time restrictions. Similar projects now involve private individuals in the generation of new knowledge. Behind the keyword distributed computing is the idea that privately used computers usually do not constantly exploit their full performance potential. For this reason, part of the unused performance can be made available by the computer owner for computationally intensive research projects. Each computer is only sent a small portion of the data to be investigated via the Internet. After the analysis, the result is returned in the same way. Complex projects such as Folding@home, which Stanford University is using to study the folding of proteins in the fight against serious diseases, are only possible when many individual computers operate simultaneously. Another example worth mentioning is the SETI@home project at Berkeley University, which uses surplus computing power from private computers to search for extraterrestrial intelligence (Beberg et al. 2009). In addition to such rather passive projects, the online encyclopedia Wikipedia relies on the active participation of its users. These users can create, modify, and update entries themselves. In this regard, Wikipedia does not control the process, so that the users themselves are also responsible for maintaining quality standards. As Wikipedia is a non-commercial project, all articles published within the platform are open to anyone for unrestricted and free use (Seitz and Reger 2010). The development described above poses a central challenge for companies in the Internet economy. On the one hand, the possibilities described enable them to develop new products, services, solutions, and concepts faster and thereby shorten the time from the beginning of a product and service development to the final marketability. On the other hand, however, these ever more rapidly developed innovations are substantially reducing the period during which products remain competitive on the market. Product life cycles are thus greatly shortened, leaving companies with less

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and less time to recoup the investment made in research and development by selling the market solution created. The digitization of the economy and society is characterized by a significant innovation dynamic, which is driven by the involvement of a large number of actors. The approach of open innovation in the digital context is of particular importance.

Open Innovation Open innovation is an approach that involves external actors in the innovation process. It contradicts the confidentiality and silo mentality of traditional research and development departments of companies. The benefits of greater openness were already identified and discussed in the 1960s, particularly in the context of inter-firm cooperation in research and development. The use of the term open innovation, in relation to the increasing acceptance of external cooperation in a complex world, was particularly shaped by Henry Chesbrough (Chesbrough 2003a; Grönlund et al. 2010; Wolfert et al. 2010). Open innovation describes the aspect that companies can use both external and internal ideas and internal and external routes to market. In the meantime, open innovation is seen as an innovation process based on the involvement of various actors. As a consequence, the innovation process is based on a targeted and controlled exchange of knowledge across organizational boundaries. For an active integration of external and internal actors in the innovation process, various incentive mechanisms can be used. For example, a sports footwear manufacturer may launch a competition aimed at obtaining design proposals for a new product from its own customers via an online interface (e.g., social media platform). Customers can provide ideas, photos, and drawings digitally to the company and exchange information. In addition to the creative creation of a design and the attention it attracts, the incentive for the customer also consists of, for example, discount or voucher codes for the company’s products. This approach shows that results from open innovation processes are not generated in a company-centered manner but include knowledge and information from external actors, such as creative consumers, Internet communities, science forums, and innovation platforms. As the boundaries between a company and its environment become increasingly permeable, innovations are transferred within and between different companies and other stakeholders. This has significant effects on the innovation dynamics of companies, industries, and societies (van de Vrande et al. 2010). Thus, the open innovation paradigm exceeds the exploitation of external sources of innovation such as customers, companies, and other organizations. Instead, it represents a change in the use, management, and employment of intellectual property as well as in the technical and research-driven generation of intellectual property. In this sense, open innovation is perceived as the systematic promotion and exploration of a variety of internal and external sources of innovative opportunities (Cassiman and Veugelers 2006; Reichwald and Piller 2009).

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Since innovations are often generated by outsiders and founders of start-ups, established companies have a recognizable disadvantage in terms of their innovation dynamics. However, these companies can take advantage of external ideas, inventions, and information by using open innovation approaches. Thus, new forms of innovation in digital business are emerging as a result of changing interaction opportunities between companies and customers. A distinction is made between the completely closed innovation, the partially open innovation, and the completely open innovation in the context of the digital transformation. While the completely closed and the completely open innovations allow the permeability of idea transfer entirely or not at all, the partially open innovation constitutes a combination of these two forms. The completely closed innovation represents the traditional innovation process that does not exceed the individual company boundaries. Here, all ideas and possible innovation approaches and developments remain within the company. This inherently excludes the involvement of external actors in the innovation process. This means that innovation is only based on internal innovation value contributions. The innovation is only transferred beyond the boundaries of the company in the course of its introduction in an existing market or the potential development of new markets. Partially open innovation, in contrast, does not fundamentally exclude the involvement of external actors from the innovation process. Although the development takes place within the company, external ideas are also allowed at specific innovation levels. These ideas are combined with the company’s internal innovation approaches and consequently influence the further course of the company’s internal innovation process. The partially open innovation is an internal innovation supplemented by a minor external innovation. Thus, the completed innovation that is ready for the market represents a mixture of internal company approaches and external ideas from the company environment. The completely open innovation describes the form in which both companies and customers or users jointly generate an innovation. In the context of digitization, the process of open innovation is supported by information and communication technologies, as these enable an efficient, flexible, and direct exchange between companies and users. For example, online platforms can facilitate open innovation. With regard to the integration of users or external actors, online platforms are involved at all stages of the innovation process. This results in a permanent exchange of ideas and innovation approaches across company boundaries. The internal and external players contribute to the innovation value in fairly equal parts. Completely open innovation assigns an active role to the customer or external actors throughout the entire innovation process. The integration of external ideas and the possible outsourcing of innovation processes allow access to a broad spectrum of competencies and knowledge. Figure 12.5 shows the forms of open innovation (content based on Chesbrough 2003b; Chesbrough and Crowther 2006; Enkel et al. 2009; Noé 2013).

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Fig. 12.5 Forms of open innovation. Source: Wirtz (2020b)

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In addition to the own activities with regard to research and development, the integration of external inventions (e.g., patents) from other actors is also a strategy for securing competitiveness. This approach is referred to as inbound open innovation (Nitzsche et al. 2016). Moreover, own innovations that are not used for business purposes can be made available to the public. For example, companies can use licensing, joint ventures, or spin-offs to exploit these innovations and capture value. This is known as outbound open innovation (Chesbrough and Crowther 2006; Bianchi et al. 2011). In summary, open innovation offers a number of significant advantages. Due to different perspectives, innovative approaches are created by involving internal and external actors. In particular, knowledge about existing customer needs or market changes can constitute a competitive advantage. In addition, necessary research and development periods are reduced by drawing on existing technologies or existing expert knowledge from external actors. In this context, potential development risks are also minimized, for example, by using technologies that have already been successfully applied or by sharing responsibility among various partners.

Increase in the Level of Digitization The increasing digitization of products and services in the Internet economy refers to two dimensions: the cost structure of digital goods and their general intangible structure. The latter has implications for the distribution and production processes, which in turn affects the organization structure of companies. Besides the influence of new product structures on the organizational design and structure of companies, there is a further important influencing factor. The changed coordination possibilities of corporate processes induced by information and communication applications considerably change the optimum ratio of specialization and coordination. Figure 12.6 presents these relationships.

General increase in the degree of digitalization through electronic network diffusion

Digitalization of products and services

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Fig. 12.6 Effects of digitization. Source: Wirtz (2000c, 2020b)

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This semantic change is reflected in the development of the industry. In the traditional economy, physical input factors are usually used to produce primarily physical output. In the Internet economy, on the other hand, it is often the case that both the input factors used and the output generated are predominantly intangible in nature and are stored on digital data carriers. The increasing importance of intangible goods in developed economies is leading to a higher proportion of virtual or digital products. It refers both to the different physical structure and to the fundamentally changed cost structure. In this context, the terms intangible and digital goods will be used synonymously in the following descriptions. The altered structure of products in the Internet economy compared to those of the traditional economy relates primarily to the physical dimension of products. In the traditional economy, physical products and physically provided services dominate economic activity. Due to the increasing importance of digital networks, immaterial goods have gained greatly in importance, as they can be transmitted via the new networks without delay and are thus available throughout the entire network. Thus, information in digital form can easily be sent over the Internet, while the same information in material form must be physically transported via parcel shipping. This semantic change is reflected in the development of the industry. In the traditional economy, physical input factors are usually used to produce primarily physical output. In the Internet economy, by contrast, it is often the case that both the input factors used and the output generated from them are predominantly intangible in nature and are stored on digital data carriers. Today, many companies find themselves between these two extremes. Although they produce material products or provide services physically, the immaterial share of value added is constantly increasing, as can be seen in the example of the modern automotive industry. While 25 years ago a normal car was still mainly mechanicsbased in its control elements, the relationship between mechanics and electronics in today’s vehicles is fundamentally different. For example, almost all innovations in the automotive sector in recent years— such as ABS, the airbag, the electronic stability program (ESP), brake assistants, lane-keeping systems, autonomous parking systems, and vehicle networking—are based on digital technology. Even formerly mechanical functions such as engine management have long been controlled by electronics. In a modern mid-size vehicle, hundreds of microchips and controllers are often connected by several kilometers of cable. The control software required for this purpose accounts for a significant proportion of the development and production costs for a vehicle. The attractiveness of immaterial goods for industry results to a large extent from two characteristics of digital goods, namely, individualization and free delivery.

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Individualization of Service Offers Digital products and services can be modelled by means of machines and thus enable the individualization of service offers. In this way, the traded products and services can be optimally adapted to the individual needs, requirements, and preferences of the customers with regard to the service to be provided. This provides substantial additional value for the customer and is a differentiation criterion in the highly competitive markets of the Internet economy. In this context, one also speaks of intelligent product solutions that provide additional benefits for users in terms of time, money, and application.

Free Delivery via Digital Networks Digital goods can be delivered via digital networks, so that traditional problems of physical distribution take a back seat. When delivering immaterial products, a manufacturer only has to provide the products on the website for retrieval or download. The customer then becomes responsible for the actual reproduction of the product. In this way, the costs are by far not comparable to the transport costs of physical products. In addition to this substantial cost reduction, there is a significant improvement of efficiency. In this context, digital products can be transferred from suppliers to customers with almost no loss of time. However, the higher degree of digitization of products in the Internet economy does not only affect the physical structure of products but has just as far-reaching consequences for their cost structure. The cost structure of digital goods differs substantially from that of material goods (Shapiro and Varian 1999). In the case of material goods, the main cost components consist of—sometimes considerable— product development costs as well as variable costs for the production of individual product units. When calculating prices, companies must ensure that at least the variable costs are covered in the short term and the full costs in the long term. This scheme is different for intangible products. While the development costs remain largely unchanged, there is a significant change with regard to the variable costs of production. In general, the reproduction and generation of the individual product units only causes very low variable costs that vary greatly depending on the medium and in many cases even converge toward zero. For example, although only low variable costs are incurred for the production and shipping of a software version on a data carrier, a download is almost completely free of charge for the manufacturer. The Internet economy thereby contributes to a substantial erosion of variable cost components. This has far-reaching consequences for pricing. As there are no significant variable costs, companies can even offer their products free of charge, at least in the short term. In addition, information products offer considerable potential for realizing economies of scale, since development costs are spread over more and more units as sales volumes increase, thereby reducing average costs per unit (Shapiro and Varian 1999). This is illustrated in Fig. 12.7.

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Average costs

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Fig. 12.7 Decrease of the average copy costs with increasing output quantity. Source: Wirtz (2000d, 2020b)

Against this background, information products are designed to achieve a very broad diffusion in order to realize these economies of scale.

Market Complexity With regard to the market and competitive environment in digital business, four main developments can be observed that enforce competition in digital markets: increasing market transparency, increasing market fragmentation, decreasing barriers to market entry and switching, and a general tendency toward disintermediation. While the first three developments are described below, disintermediation has already been addressed in Chapter 9.

Increase in Market Transparency In the traditional economy, markets are generally characterized by a low to medium degree of market transparency. There is always a discrepancy in the level of information between the seller and the buyer, as the seller is usually able to build up an information advantage due to his position in the market. In this context, one speaks of information asymmetry between buyer and seller. The seller can use this advantage to differentiate prices and thereby exploit differences among buyers with regard to their willingness to pay.

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In the Internet economy, this situation has changed fundamentally. One of the most important characteristics of the Internet economy is the largely free flow of information, which, thanks to digital business, is contributing to an ever-increasing transparency of the markets and to a significant reduction in friction. One speaks of increased transparency because the products and services traded and offered in digital markets are manageable and these markets are more comparable than conventional markets due to easily accessible information. Friction is the term used to describe factors that bind demanders to one supplier and thus prevent them from switching to another supplier. The costs of obtaining information in the traditional economy are an essential component of frictions. When making a purchase decision, consumers must weigh the benefits of an additional comparison of offers against the costs associated with obtaining information. However, in the traditional economy, these costs are much higher than in the Internet economy (Evans and Wurster 1999). The characteristics of computer networks are the driving force behind a high market transparency, enabling customers to retrieve any information at any time from any location. This means that market penetration is easier and particularly less expensive and time-consuming. The search costs of market participants for observing and analyzing the market are hence very low. In contrast to the traditional economy, where product-based information rests upon the seller’s consultation, digital markets allow customers to collect information without much effort by using, for example, price comparisons, digital communities, or test reports of online products. The customers are able to adjust their level of information to that of the seller and are no longer dependent on filtered information. This phenomenon is known as reverse markets (Slywotzky et al. 1999). However, market transparency also results in a vast amount of information that is difficult for customers to manage and structure. This so-called information overload partly undermines the advantages of additional transparency (Clemens and Schinzer 2000). Just like product information, price information is also easily retrievable for customers in the Internet economy. Price comparison portals facilitate the comparison of prices among different providers. For this purpose, the user inserts a specific product on the price comparison portal, which automatically compares the price of the product among a large number of online shops. This query is then presented to the user in an edited version with the respective data. In this way, the user gets a good overview of where and at what price the desired product is available. Price comparison portals exist in different forms and specifications. Well-known portals are, for example, Pricegrabber.com, Shopsavvy.com, or shopping.com. By comparing the prices of different providers, it is possible to achieve substantial savings. Figure 12.8 shows that a price comparison for selected products on shopping.com offers significant potential for savings. The price elasticity of demand, i.e., the extent to which consumers react to a company’s price variation by adjusting the quantity of demand, is significantly higher in digital business than in conventional markets. Due to the high market

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transparency, substitutes can be obtained with low information costs. For this reason, there is a substantial incentive to change suppliers even for minor price changes. Against this background, companies are forced to offer their products and services at competitive prices. As a consequence, the general price standard is levelling off, and companies are increasingly affected by an intensive price competition. This also applies to retailers who do not manufacture products but sell them. If the products and/or services are similar, the price becomes the primary selection criterion (Shapiro and Varian 1999). This development carries the risk of a downward price spiral. Despite the substantial costs of customer acquisition in digital business, some companies undercut each other in order to retain or acquire customers. As a result, the attractiveness of markets for companies is rapidly diminishing. Typical exceptions are established companies which, due to their age, have advantages over other companies in terms of brand presence and fixed assets (Kephart and Greenwald 2000). For example, products are often available at lower prices from other suppliers on the Internet than from Amazon. However, users trust the company, enjoy the advantages of 1-Click ordering, and still purchase the product from Amazon. This is particularly the case when the price difference is marginal.

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Fragmentation of Markets The fragmentation of markets can be seen as the increasing fragmentation of society. This phenomenon relates in particular to the period after the emergence of the Internet economy and thus includes the individualization of market participants and their consumption preferences. Consumer behavior is individualizing in the sense that there is an increasing demand for products and services that have a certain uniqueness or are tailored to the individual preferences of the consumer. These individualization tendencies have far-reaching implications for marketing, product development, and design. Marketing in the Internet economy is primarily characterized by an increased complexity of market cultivation. The increasingly individual customer preferences must be captured and analyzed in order to narrow down and specify the targeted market segments. In order to retain existing customers and acquire new customers, it is therefore necessary to anchor their individuality as a basic concept in the market development strategy. This can be achieved through targeted one-to-one marketing, in which the focus is no longer on addressing customers collectively but on building individual customer relationships (Wirtz 1995a). However, one-to-one marketing does not exclusively refer to an individual approach to customers but in particular to a product development and design that is as individualized as possible. These trends are summarized under the apparently contradictory buzzword mass customization (Wehrli and Wirtz 1997). With mass customization, companies try to use the cost advantages of mass production and simultaneously individualize their products. The first approaches to mass customization were already evident in the 1980s. For example, some jeans manufacturers started to give their mass-produced trousers a certain individuality by means of a serial number stamped on the label. In this case, however, one cannot speak of far-reaching individualization. With the help of digital technology, it becomes easy for providers to adapt their products to the individual wishes of small customer groups or even individual consumers. If the company offers a separate version of the product for each customer, one speaks of processing a segment-of-one. This approach is particularly relevant and has already been implemented to a large extent for information goods. Here, information is tailored exactly to customer needs and presented in a customized form (Wang et al. 2012). An example of such a service is the company Spreadshirt.net, where customers can design their own T-shirt. Another example is Mymuesli.com. Customers can individually configure their own muesli variant from approximately 80 ingredients. These services enable customers to receive a product specifically tailored to their ideas. Such a service contributes significantly to an increase in convenience, a reduction in costs, and an increase in benefits for the customer. Thus, providers of individualized product solutions have a major competitive advantage that other market participants try to imitate. In this regard, the individualization of products

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is subject to the proliferation effect shown in Fig. 12.9. This effect leads to the establishment of a well-designed individual solution that is widely accepted by consumers. Proliferation effect of individualized products

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Fig. 12.9 The proliferation effect of individualized products. Source: Wirtz (2000c, 2020b)

Reduction of Market Entry Barriers Barriers to market entry are characteristics of a market or market segment that tend to deter new competitors from entering the market. Baumol et al. (1988, p. 282) define a market entry barrier as “anything that requires an expenditure by a new entrant into an industry, but imposes no equivalent cost upon an incumbent.” Market entry barriers significantly reduce the attractiveness of a market for potential newcomers and can be divided into three categories (Wirtz 1994): • Structural barriers • Strategic barriers • Institutional barriers Structural barriers are structural peculiarities of a market involving, for instance, the intensity of fix costs and initial investments that impede market entry (e.g., in the search engine market). If a market, such as the automotive market, is characterized by such a cost structure, it becomes very difficult for potential new entrants to build up the necessary infrastructure for a successful entry. With regard to the Internet economy, substantial changes primarily occur in the area of structural barriers. Digital business has particularly changed the

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technological and financial barriers of market entry. While in the traditional economy many companies built their market position upon specific technologies, processes, and production expertise, the Internet economy is characterized by an increasingly homogeneous technology that not only achieves a high level of diffusion in the market but also is easily accessible. Thus, technological barriers to market entry exist only conditionally. Closely related to this topic are the cost benefits with regard to product presentation and customer communication that arise from digitization. This is the initial point of decreasing financial market entry barriers, since the Internet allows interaction with customers at much lower costs. Due to low entry barriers, digital business also facilitates reaching potential customers in completely new markets particularly in different geographical regions. The ratio of the cost of market entry to the associated opportunities that represents the determining factor for the market entry of a company changes significantly. While in the traditional economy there is only a small number of markets in which the market entry opportunities exceed the costs of market entry, in the Internet economy, the opportunities increasingly outweigh the costs due to decreasing costs of market entry. In contrast, the objectives of strategic entry barriers are rather issues pertaining to strategic agreements and collusions than physical issues. In this context, newcomers face substantial strategic defensive behavior, so that an entry is severely hindered by the behavior of companies that are already established in the market (e.g., Microsoft in the software market). Institutional barriers primarily refer to regulatory conditions that usually concern legal standards. For example, for many national online shops it is very costly and time-consuming to execute transactions with foreign customers, as many formalities regarding import and export regulations or even customs regulations have to be observed. Moreover, the accreditation as a certified online shop by a reputable appraisal company and the possibility of accepting credit cards are institutional barriers to market entry. The details of these entry barriers are not explicitly addressed at this point. With regard to the Internet economy, substantial changes primarily occur in the area of structural barriers. Digital business has particularly changed the technological and financial barriers of market entry. While in the traditional economy many companies built their market position upon specific technologies, processes, and production expertise, the Internet economy is characterized by an increasingly homogeneous technology that not only achieves a high level of diffusion in the market but also is easily accessible. Technical solutions become common knowledge, so technological barriers to market entry only exist to a limited extent. From a technological point of view, market entry is significantly less complex and easier to handle. Closely related to this topic are the cost benefits with regard to product presentation and customer communication that arise from digitization. This is the initial point of decreasing financial market entry barriers, since the Internet allows interaction with customers at much lower costs. This is primarily due to the fundamental

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characteristics of the Internet economy, namely, the high degree of digitization and networking. In order to reach customers in a new market, a company would have to set up branches in all medium-sized and large urban centers. In the Internet economy, companies only need a central digital presence that can be accessed nationwide— and, apart from language barriers, worldwide. This reduces the required capital expenditure to a fraction of the amount previously needed. As the use of the Internet is constantly increasing, this development also reduces the investment per customer. At the same time, the quality of the customer approach improves, as digital, interactive communication applications enable companies to address customers in a precise and comprehensive manner. This development also enables companies to reach potential customers in completely new markets. In the traditional economy, entering a geographically foreign market would involve considerable efforts and costs. In the Internet economy, these geographical challenges can be solved by means of modern information and communication applications. The ratio of the cost of market entry to the associated opportunities that represents the determining factor for the market entry of a company changes significantly. While in the traditional economy there is only a small number of markets in which the market entry opportunities exceed the costs of market entry, in the Internet economy, the opportunities increasingly outweigh the costs due to decreasing costs of market entry. Figure 12.10 shows the changed cost-opportunity ratio of market entry of digital businesses in contrast to traditional businesses. It illustrates that in the Internet economy, there are more markets below the boundary line, on which opportunities and costs offset each other, thus enabling a market entry.

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Fig. 12.10 Changed cost-opportunity ratio of market entry. Source: Wirtz (2000c, 2020b)

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In summary, an erosion of traditional entry barriers can be observed in technological and financial terms. This reduces the risk of market entry and creates an incentive to strive for the penetration of promising markets. This increases the number of companies operating in a market and thus also the competitive pressure in the respective market.

Customer Empowerment The fourth force driving the digital business development is customer empowerment. This change in the business environment mainly concerns the customers themselves. The rising transparency and accountability of actions and the possibility that customers can exchange their desires and opinions and unite in social networks and communities all became possible due to modern information and communication technologies. In particular, customers not only claim more participation in production and design but also a renewed B2C interaction. Here, companies have to act, for instance, by providing a more transparent form of production, management, and development by integrating customers. Another challenge of digital business companies is decreasing customer loyalty that results from declining switching costs and switching barriers (Hsu et al. 2013). The increase in market transparency in the Internet economy enables competent and well-informed decision-making for customers. Although companies also have access to this comprehensive information, an opposite development partially offsets the benefits. Thus, the increasing diffusion of digital business offers the opportunity to create an overview of the market, while the complexity of the markets in the Internet economy are steadily rising at the same time. For example, while the spread of digital business offers the opportunity to create a market overview, the continuously increasing market complexity counteracts this positive development. From a corporate perspective, the increase in complexity can be attributed to two phenomena (Adam and Johannwille 1998; Meffert et al. 2019). On the one hand, this is due to the steadily increasing speed of innovation that significantly shortens product life cycles and, on the other, due to the increasing fragmentation of markets (Link 1999). How these phenomena emerged, how they work, and what they mean for companies in the Internet economy will be described below. From the provider’s point of view, increasingly changing customer behavior constitutes uncertainty and risk. Customers are showing less consistent and observable patterns of behavior over a longer period of time, which is why their behavior becomes predictable for companies. They act opportunistically and exploit the changing situation with regard to their market position. This modified market position of consumers originates from a change in traditional market structures in almost all economic sectors from seller markets to buyer markets. The power of customers has grown substantially, making it the transactiondetermining factor (Slywotzky et al. 1999).

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In this context, the modified power structures on markets of the Internet economy are mainly related to two phenomena. On the one hand, the level of information available to customers is almost equal to that of the provider, so that the customer can be seen as an equally powerful transaction partner. On the other hand, the level of cooperation and coordination among customers has increased. How the higher information level of consumers as well as their coordinated and organized approach influence markets, how this changes the power structure in concrete terms, and what this means for market participants are the subjects of the following discussion.

Reduction of Switching Barriers The reduction of existing switching barriers for customers in the Internet economy is closely related to the increase in market transparency. Switching barriers refer to factors generated by companies or incurred by features inherent in the system of markets or industries, binding customers to specific suppliers and preventing change to another provider without friction. In the Internet economy, switching barriers consist of three main categories: (1) technological switching barriers, (2) qualification-related switching barriers, and (3) psychological switching barriers. Technological switching barriers arise when customers are bound to other products available on the market due to the lack of technological compatibility. This is the case, for example, when product components of different companies cannot be used jointly or across systems. A popular example represents the products of Apple Inc. All products of Apple are compatible with each other and mostly incompatible with products and systems of other producers. Therefore, Apple bound their customer to the brand by creating a lock-in effect. In the Internet economy, the importance of technological switching barriers has significantly changed because users and customers may recognize a lock-in situation a priori and may therefore avoid it for the sake of comprehensive information access. Consequently, the increase in market transparency mentioned earlier reduces switching costs due to the decrease in search costs. Qualification-related switching barriers rest on investments in system-specific training. This not only represents the knowledge acquired in the context of training courses but especially the experience gained in terms of system use. These barriers have the same effect like learning effects known from production management, since they enable steady increases in efficiency when using the system. When changing the system, both the acquired knowledge and the gained experiences partly get lost since these are usually not at all or only transferable to a small degree. The development of the Internet economy has a degenerative impact on the qualification-related switching barriers, since the information society is not only characterized by a much wider diffusion of knowledge but also by a generally higher level of staff education with regard to information and communication technology.

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In addition to these objectively measurable switching barriers based on technology and training costs, a third type of switching barriers does not belong to the main group of value-based barriers. This type refers to psychological barriers such as the commitment to a brand or company for the purposes of identification (Wirtz 2000a; Wirtz and Lihotzky 2001). These psychological switching barriers are of particular relevance in traditional economics, as they ensure a customer’s loyalty to the brand of a company despite a price premium and create an emotional attachment of the customer. In the Internet economy, the psychological barriers begin to erode, especially the traditional switching barriers such as loyalty and commitment to a retailer (Toufaily et al. 2013). This is mainly a result of increasing homogenization of product offerings in the markets, an improved objective comparison of products, and the anonymity of customer/supplier relationships. A customer therefore usually chooses the product with the best price-performance ratio. Due to the homogenization of product offerings, the price has become the primary selection criterion in the Internet economy (Shapiro and Varian 1999). The resulting decrease in customer loyalty and the associated issues of customer retention in the Internet economy represent the core task of marketing and customer relationship management in digital business (Timmers 1999). The main objective of marketing is therefore to build strong brand identities and to identify new psychological switching barriers to compensate for decreasing customer loyalty and to connect the customers’ switch to competitors with significant switching costs.

Increase of Market Power The previous sections have already dealt with the increased opportunities for companies to coordinate processes as a result of the expansion of digital technologies. However, the use of improved coordination mechanisms is not limited to companies but also concerns consumers who can coordinate themselves by means of digital networks and thus significantly increase their market power. The increase of market power primarily refers to the coordination and cooperation of demand potential ultimately leading to market advantages for consumers. In this context social media play an important role. Social media is a group of Internet applications that are technologically and ideologically based on Web 2.0 and enable the posting and exchange of user-generated content (Kaplan and Haenlein 2010). Social media allow users to present themselves on the Internet and interact with other users or network with them. Well-known examples of social media are Facebook, Twitter, YouTube, Snapchat, WhatsApp, or Wikipedia. The increasing market power of the consumers is largely based on the diffusion of social media applications that allow users to coordinate and cooperate independent of time and location. In addition, the multiplier effect opens up the opportunity of disseminating information quickly and dynamically. In social media networks with high user numbers, the multiplier effect results from the sharing and linking of content.

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Four Forces of Digital Strategy

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Multipliers are often opinion leaders (so-called influencers) who are known and considered experts within a social media community. Their contributions usually have a wide reach and are further disseminated by users. The original message of a person is shared within a network and spreads exponentially within this network. Companies also try to use this multiplier effect to their advantage (Wirtz 2016a). The high interaction and reaction speed of users on social media platforms enables a high level of market transparency, as users can exchange information on the respective topics. This can lead to parallel behavioral strategies among a large number of users, which in turn strengthens their implicit power over companies. In 2015, for example, the food company Nestlé attempted to improve its image through a social media campaign. The company wanted to enter into a constructive dialogue with the public through the interactive communication opportunities offered by social media. However, this strategy did not work. Within a short period of time, dedicated users asked very critical questions and addressed several aspects for which Nestlé has been criticized for quite some time (e.g., child labor, powdered milk prices in Africa, water privatization, or the exclusive focus on financial interests). These questions quickly spread around the world via the short news service Twitter. The high speed of interaction and reaction and the speed and dynamics of information exchange and dissemination have shifted the power from Nestlé to the social media users. Due to the critical contributions of individual users, the originally planned social media campaign that was intended to help improve Nestlé’s image quickly developed into a storm of indignation in the Internet community. This exposed Nestlé to concentrated criticism in the social media (a so-called shitstorm), which further damaged the company’s image (Stern 2015). Social media communities are particularly relevant for digital business. Especially brand communities whose basic theme is related to a specific topic, a product, a product class, or a product provider itself benefit from the emergence of social media. As information about products or providers spreads very quickly, positive and negative experiences affect the other community members and can have a major impact on products or providers. By providing collective feedback, social media communities are in a position to change a provider’s product offering or even whole market development strategy. Therefore, social media communities not only reveal tremendous potential but also constitute a certain risk with regard to the public perception of the respective company. Although communities also exist in the traditional economy, they do not provide the high level of interaction and reaction, the multiplier effects, and the speed and dynamics that social media communities offer. Against this background, social media brand communities are considered a new, innovative instrument for communicating with existing and/or new target groups of a company via social media (Naylor et al. 2012). The information available in social media communities holds substantial potential to learn about representative customer preferences and to derive the needs for future product innovations at an early stage. In this way, targeted observation of social

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media brand communities can provide insights into the target group that make an important contribution to sales and business development (Naylor et al. 2012). The crucial advantage of social media communities is that the target group can be assessed very precisely and advertised accordingly. Moreover, companies can use social media communities as a platform for the targeted transfer and diffusion of expert and insider knowledge regarding their products and services. This enables an active control of information flows and an influence on possible undesirable developments in the target group. The establishment of own communities can help companies to determine the thematic orientation autonomously, as they act as initiators themselves. In this way, companies can conduct market research on very specific topics such as the functionality of products and simultaneously offer customers a community of like-minded people. Thus, companies are able to create an emotional bond to their customers. Social media communities run by companies also offer customers the opportunity to communicate problems or dissatisfaction with the company’s products and services. In this way, customers give companies the chance to react to dissatisfaction and retain customers, on the one hand, and help them to identify and eliminate the shortcomings of their own products and services, on the other. In traditional economics, it is usually a problem within customer loyalty management to get customers to openly criticize the company’s performance. This is why a large part of the literature on customer loyalty deals with the problem of how customers, in the event of dissatisfaction, can be persuaded to contradict instead of leaving without any comment (Peter 1997). A good example of the implementation of a company-owned social media community is the sporting goods manufacturer Adidas (Wirtz and Elsäßer 2016a, b). Adidas provides interested parties a social media platform on Facebook where they can exchange ideas with other participants and share their thoughts and ideas. In addition, the company uses the platform for dialogue with existing and potential buyers to spread brand messages as well as photos and videos or to inform consumers about events. In summary, social media communities, on the one hand, increase the market power of consumers but, on the other, also offer marketing-relevant opportunities for companies (Naylor et al. 2012). Through the communicative factor of the Internet, social media enable consumers to organize their joint purchasing intentions and bundle their demand. In this way, they can achieve better conditions together than they could achieve individually. This is additionally supported if the providers act in isolation. In particular, strong price competition in the respective platform often leads to suppliers undercutting each other’s prices, which in turn benefits the demand side. The Internet also enables a high level of market transparency. It is easy for consumers to compare prices on the Internet and select the best offer in each case. This price pressure is even stronger when products and services are interchangeable and additional services, such as after-sales service, are not required. Low switching costs and weak network effects also make it easy for the demand side to switch suppliers.

12.2

Digital Business Value Activity System

431

In addition, the Internet and especially social media allow for a fast and dynamic dissemination of information, enabling consumers to obtain information independent of traditional media (e.g., press or corporate information). Due to these developments, there are more enlightened consumers (smart customers) who are well-informed and decide autonomously. Their high level of knowledge and information among their peers, combined with the high degree of unidirectional response and the weak barriers to switching, strengthens the influence of demanders and thus increases their market power (smart customer empowerment). Digital communities relating to a product, a product category, or a brand are particularly relevant for digital business companies. Information about a product or provider spread quickly, so positive and negative experiences considerably influence the position of the supplier or the product. Digital communities are thus able to change service concepts or even marketing strategies of a provider through their collective feedback (Goh et al. 2013). In light of the aforementioned four driving forces of digital business, an integrated management approach is mandatory to handle the multitude of interrelated impacts and related activities. Against this background and in view of the strategic environment of digital business, the following outlines the digital business value activity system (dVAS).

12.2

Digital Business Value Activity System

Value activity systems are based on the concept of the value chain, which describes a set of organizational activities performed to deliver a product or service to the market. The value chain concept was developed in management research and first described by Michael E. Porter (1985). The underlying idea of the value chain rests upon a process view of business organizations.

Digital Value Chain From this perspective, a company is a system made up of subsystems that transform input factors into outputs. The effectiveness and efficiency of the associated activities needed for the transformation process finally determine the costs and the profit of the company. The exemplary digital business value chain presented in Fig. 12.11 shows that the activities of the value chain comprise five dimensions: (1) product and service concept, (2) product and service development, (3) technological distribution, (4) marketing and customer relationship management, and (5) digital payment. The first step of the value chain deals, for example, with product and service selection for the digital business Internet presence as well as its layout and design (for the following see also Wirtz 2010b, 2016b). In the next steps, the respective product and services have to be developed, and their technological distribution needs to be set up (e.g., pull vs. push concept). The

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Product/ service concept • Product/ service selection

• Digital Design • Definition of target customer groups

Product/ service development

Technological distribution

• Content generation

• Pull (e.g. downloads)

• Development of products and services

• Push (e.g. RSS feeds)

Marketing/ CRM • Customer relationship measures • Marketing channels

Digital Business Strategy

Digital Payment

User/ customer

• Processing of payments • Receivables management

• Communication policy

Fig. 12.11 Digital business value chain. Source: Wirtz (2000c, 2020b)

marketing and customer relationship-related step of the value activity is of vital importance. Here, the access to the user is determined, which requires customeroriented marketing and relationship measures. Finally, the imposed fees and charges have to be processed, which completes the value chain activity. The dVAS model is conceptually built on the value chain approach but provides a more differentiated perspective on the entire system and its interfaces. Therefore, digital business is often referred to as a comprehensive approach to elaborate customer-oriented services and enhance effectiveness and efficiency. Thus, it is an important element of change management programs across the world. Figure 12.12 illustrates the digital business value activity system (dVAS), portraying the key value activities that need to be comprehensively planned, organized, steered, and controlled to promote effective digital business within the corporate environment. Despite its online character, digital business is not a completely digitized system since it also requires managing procedures and operations behind the software. Hence, efficient and goal-oriented digital business presupposes solid underlying routines, processes, and structures. For this reason, the dVAS model is based on a value activity perspective of companies, outlining a digital business system made up of subsystem activities that have specific inputs, transformation operations, and outputs, which involve acquisition or consumption of human, financial, or knowledge resources (for the following see also Wirtz and Daiser 2015). Therefore, the better a company manages individual processes, the more efficient the digital business system runs. The dVAS model first differentiates between the information-transaction-service (ITS) front office, which is the front line part of the company with a direct client connection, and the people-system-process (PSP) back office, which deals with internal activities of the company without a direct client connection.

People

System

Supportive Process

Context Firms sorting and/or aggregating available online information

11

Awareness

4c 4c

4a 4a 2 Consideration

4b Dissatisfaction

Digital CRM

33

Commerce Connection Firm initiating, negotiating, Firms providing physical and/or fulfilling online and/or digital transactions network infrastructure

Content Firms collecting, selecting, compiling, distributing, and/or presenting online content

Digital Service Provision according to 4C-Typology

ITS Front Office

Transaction Points

Value Generation Process

Data Security System

IT Infrastructure

Skill and Change Management

Human Resource Management

PSP Back Office

Service Points

Usage

12.2 Digital Business Value Activity System 433

Reference Points Reference Points Reference Points

Companies Non-Profit Institutions Consumers

Customer Touch Points Information Points

Process

Fig. 12.12 Model of digital business value activity system (dVAS). Source: Wirtz and Daiser (2015)

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ITS Front-Office Activities The ITS front-office activities include digital service provision through customer touchpoints that are subdivided into information points, transaction points, and service points. The efficient digital service provision is supported by digital customer relationship management (digital CRM), showing an integrated digital business customer relationship process. The provision of digital services at the front office can be classified according to the already mentioned 4C-net typology (Wirtz 2000c; Wirtz and Lihotzky 2003). There are four areas of digital services provided in a digital business setting. Many Internet ventures offer several types of the defined classes of digital services in a hybrid or integrated form. However, it is useful to understand the archetype digital business activities to appreciate the specific characteristics and to combine these in a most suitable fashion for the specific situation. Content-orientated digital service provision focuses on collecting, selecting, compiling, distributing, and/or presenting online content. The value proposition of such services results from convenient, user-friendly online access to relevant content. Most digital business companies have indirect, transaction-independent revenue streams through online advertising and data value. However, companies increasingly also receive direct revenue streams for providing premium content. Commerce-orientated digital service provision focuses on different aspects of commercial transactions with regard to initiation, negotiation, payment, and the delivery. Those firms provide cost-efficient transactions for buyers and sellers of products and services. Most e-commerce businesses substitute or support traditional sales and have direct revenue streams. However, a large part also promotes sales on a commission basis such as eBay. Context-oriented digital business services structure already existing content on the Internet, instead of offering new content. Search engine providers like Google or bookmarking pages, for instance, offer such services. By increasing transparency and reducing complexity, they thus help users to navigate through the abundance of web content. These businesses rest upon indirect, transaction-independent revenue streams through online advertising. Connection-oriented services comprise intra-connection (community) and interconnection services. The former provides a network infrastructure that enables people to communicate via electronic channels, such as mailing services, instant messengers, social networks, file exchanges, and customer opinion portals. Interconnection services typically generate their revenues directly from usage or subscription. Online-based communication services, by contrast, usually rest on indirect, transaction-independent sources of revenue. Besides digital service provision based on 4C-net, digital CRM is another important aspect with regard to dVAS. Customer relationship management (CRM) is one of the core factors of successful businesses. This process consists of a sequence of the following phases: awareness, consideration, usage, reconsideration, dissatisfaction, and recovery (Wirtz 2000c, 2020b). In the awareness phase, the customer recognizes available services that suit his or her needs. Based on this, an initial customer contact occurs via information and

12.2

Digital Business Value Activity System

435

communication technologies (e.g., visiting the website). In the following phase of consideration, the potential user is exposed to the service offerings from the digital business system, which are tailored to the expected needs of the user. This requires a profound knowledge of the potential user needs and preferences. In the usage phase, the user should select the service desired and start processing it. If the user is satisfied with the handling and the outcome, he or she may reconsider using the digital business service offer again. Therefore, companies need to design the services offered in a way that satisfies the needs of the user. At this point of the interaction, companies should check user satisfaction by means of user feedback or monitoring systems that support the advancement of the services provided (Hsu et al. 2012). This is particularly important since a dissatisfied user may not use the service again, may discourage others from using the service, or may leave the entire platform. In this case, measures for recovering dissatisfied users have to be at hand. The customer touchpoints (information, transaction, and service points) are the ITS front-office interface to the digital business stakeholders and thus the actual connection between the digital business system and the customer. The parallel use of multiple user touchpoints across all channels has become a common procedure (e.g., online banking), helping information and service providers to optimize customer-specific service provision and to guide customers toward economically reasonable interfaces (Wirtz 2012a). Apart from the technological benefit of managing server requests, particular customer touchpoints provide customers with bundled, customized service offers, increasing their overall satisfaction. This is important since companies not only need to consider economic but also customer-oriented aspects in order to achieve a positive value contribution for the digital service offering. If only considered under cost-efficiency perspectives, the expected effect may even be turned upside down (Rayport and Jaworski 2004). The distinction of the different user touchpoints is based on their primary function. For information points, this is the provision of information (e.g., information on product features or warranty information). In the case of transaction points, this is the transaction-based service offering (e.g., scheduling an appointment). Service points mainly deal with services provided before or after a transaction process as well as inquiries that demand staff involvement (e.g., complaint management, inquiries regarding product failures, customer callbacks). A further vital aspect is the reference points for business clients, institutional clients, or private customers. Here, a reference point refers to any source of information that may influence the user in using or not using digital business services. If, for instance, a friend or a colleague has made a dissatisfying experience while using the digital service of a company, this may influence an individual’s intention to use this particular service, irrespective of the actual quality and efficiency of the service. Although one can only indirectly influence these reference points, one needs to bear in mind their potential impact on customers.

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PSP Back-Office Activities The PSP back-office activities deal with the internal activities of the company. The first pillar represents people including human resource (HR) management and skill and change management. The primary challenge of human resource management refers to recruiting, training, and motivating employees. Since people are a vital source of skills, knowledge, and value, good human resource management can create a sustainable benefit in implementing and running an efficient digital business. Skill and change management are vital aspects to change the current business organization and move employees from the status quo to the digital business environment: first, because a digital business setting demands other skills and competencies than non-digital business practice and, second, because the shift from the old paperbased to new electronically oriented structures and procedures requires to substantially transform the entire company. Therefore, training and accompanying employees and professional change management are key factors for a successful digital business. The second pillar refers to system, which includes the IT infrastructure and data security system. IT infrastructure, on the one hand, relates to the support systems that allow to process and manage information as well as to maintain daily operations (infrastructure) and, on the other hand, to the innovation process of developing and integrating new applications and functionalities (development). Since digital business depends to a high degree on well-working IT systems and innovative solutions, the related activities are cornerstones of a rewarding digital business system. The data security system refers to an important aspect of digital business. Here, it is important to emphasize that the actual security of private customer data and the perceived security of individual data and network-based information processing are crucial factors that need to be maintained. If people believe that their personal information is not stored or processed confidentially and securely, they will tend to oppose the digital business-related online data storage and processing, since a certain level of trust is necessary, especially for transactional offers. The third pillar of the PSP back office refers to value-generation processes and supportive processes. Value-generation processes are inbound logistics involving processes related to receiving, storing, and distributing inputs internally. Operations represent transformation activities that change inputs into outputs that are sold to customers. Outbound logistics are activities that deliver products or services to the customers. The value-generation processes finally comprise marketing and sales, referring to processes that aim at persuading users and customers to purchase from their own company instead of competitors’. Besides the value-generation processes, supportive processes are also relevant activities of the back office. These processes, for example, include digital procurement (get resources for operations), accounting, legal, administrative, general management, or activities for protecting a company’s knowledge base. Companies need to manage the associated value activities of the

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Strategy Development in Digital Business

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digital business value activity system in a systematic way. According to Chandler (1962, p. 314), “structure follows strategy”; thus leading and operating digital business value activities effectively and efficiently requires an efficient digital business strategy, which is explained in the following section.

12.3

Strategy Development in Digital Business

Digital business is characterized by fast-moving innovation cycles that pose special challenges for companies active in this field. In order to survive in digital business, companies should have a high degree of adaptability. In particular, they must be able to respond to new requirements in a sustainable and systematic manner and identify emerging developments at an early stage. In addition, it is crucial to systematically plan and implement the strategic changes that are required to ensure the company’s future before customers or competitors can enforce such a change. Therefore, this section deals with the central question of corporate strategy in digital business. Strategy determines the fundamental positioning of the company in the market and shapes the resource base and use. The term strategy has Greek roots and was originally closely related to military action (the following is based on Wirtz 2010b, 2013a). In this context, strategy refers to the leadership of an army up to the first encounter with the enemy, as from that point in time army leadership became tactical. This strict military view is usually not found any more in today’s understanding of business strategy. It is rather the creation of a sustainable rent that can be seen as a key element of modern strategic corporate management, as “strategy can be viewed as a continuing search for rent” (Mahoney and Pandian 1992, p. 364). In particular, two dominant strategy paradigms have evolved within international management research during the 1980s and 1990s. On the one hand, there is the market-based view of strategy that mainly builds upon the notions of Michael E. Porter concerning industrial organization research (Porter 1980, 1985, 1987). On the other hand, there is the resource-based view that specifically attributes enduring organizational success to organizational resources (Wernerfelt 1984). The underlying principle of the market-based view is the structure-conductperformance paradigm that relates an achieved outcome to market structure and behavior or in other words “to explain the competitive success of firms, we need a theory of strategy which links environmental circumstances and firm behavior to market outcomes” (Porter 1991, p. 99). Porter’s 5-forces model considers the industry in which a company operates and the competition in that industry, which is determined by current and potential customers, competitors, buyers, substitute products, and suppliers. Based on this, market-induced generic strategy options in the form of cost leadership and differentiation are derived, which can be applied industry-wide or segment-specifically. In contrast, the resource-based view tries to explain the emergence of competitive advantages through the heterogeneity of resources: “Regardless of the nature of the

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rents, sustained competitive advantage requires that the condition of heterogeneity be preserved” (Peteraf 1993, p. 182). The term resource refers to “[. . .] all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies” (Barney 1991, p. 101). However, resources only lead to competitive advantage if they share the following four basic characteristics: (1) valuable, (2) rareness or access barriers, (3) lacking substitutes, and (4) imperfectly mutable and combined and/or coordinated in a success-oriented way. Finally, strategy-related rents are based on the access and exploitation of asymmetries in the company-specific resource allocation. The competence-based view, which is often used in a similar manner like the resource-based view, tries to explain organizational success—in the sense of achieving strategic goals—with the creation and use of resources, skills, and competencies. Here, Sanchez et al. (1996), for example, describe competency from an organizational perspective as a target-oriented, repeatable discretion for an organization’s collective action. Against this background, this section allocates the competency to the resource-based view and thus refers to both when mentioning the latter. Currently, strategic management that mainly deals with making fundamental decisions about the intermediate and long-term goals and activities of the organization is understood in terms of a dual strategy, taking into account both the market and the resource-based view (Beynon-Davies 2013). Apart from that, one can observe that the two different perspectives based on the market-based view and the resource-based view partly converge to generate a harmonized theory without isolating the market structure and behavior-oriented or resource- and competency-based factors: “Strategy is the direction and scope of an organization over the long term. It ideally matches its resources to its changing environment and, in particular, its markets, customers and clients so as to meet stakeholders expectations” (Johnson and Scholes 1993, p. 10). An isolated development of strategies seems to become increasingly obsolete, since a one-sided focus on resource-oriented competencies or on market structural factors and market behavior-related factors negates other strategy-relevant aspects. Therefore, an integrative understanding of strategy that combines the essential, success-relevant elements of the market-based view and the resource-based view is likely to provide a vital basis for strategy formulation in the future (Schoemaker 1993; Rühli 1994). This integrative view is particularly important for the Internet economy and digital business. On the one hand, creating, combining, and coordinating innovative resource bundles is a key element of an organization’s activities. On the other hand, carrying out evaluations and adjustments between the primary internal development perspective of the resource-based view with external market-oriented aspects and factors also represents a key element. In light of the above-mentioned deliberations, developing a digital business strategy requires to integrate existing strategy concepts within the company.

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Strategy Development in Digital Business

439

The Internet economy and digital business are particularly affected by strategic market behavior (e.g., innovation behavior and collision strategies) and market structural factors (e.g., barriers to market entry and economies of scale of information-based goods). In addition, substantial evolutionary dynamics and a pronounced time competition influence the Internet economy and digital business. Here, renowned experts proclaim that during a “normal” year of competition in the traditional economy, four “Internet years” pass in the Internet economy. The associated speed of change and innovation ultimately leads to a market and competition system with extraordinarily high evolutionary dynamics, in which the sequence of invention, innovation, variation, adaptation, imitation, and substitution produces a previously unknown, compressed intensity of selection. This means that the Internet economy is characterized by an extreme variant of evolutionary change. Against this background, it seems to make sense to consider aspects of evolutionary theory and economics for the strategic management of the Internet economy (Darwin 1963; Freeman and Boeker 1984; Wieland 1975). Figure 12.13 shows an evolutionary and change process scheme for corporate activities in the Internet economy in a highly simplified form. The term strategy is also used in the field of brand or product management (product and brand strategies) (Haedrich and Tomczak 1990). In this context, especially in marketing, one speaks of instrumental strategies that are intended to control the use of instruments in the marketing mix (Haedrich and Tomczak 1990; Becker 2013).

Time Competition

Invention

Innovation

Adaption

Imitation

Evolutionary process of Variation

Selection

companies in

the Internet economy

Substitution

Retention

Fig. 12.13 Scheme of evolution and change processes in the Internet economy. Source: Wirtz (2000c, 2020b)

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In the area of interorganizational corporate relations, the term strategy was used primarily in connection with strategic alliances (Albach 1992). However, cooperative relationships or joint ventures are also referred to as cooperative strategies (Harrigan 1985; Contractor and Lorange 1998). It can be seen that the term strategy is used in different ways and at different levels of business aggregation (from the overall business to the product level). On the one hand, this is due to the universal popularity of the terms “strategy” and “strategic” and, on the other, due to the widely differing understanding of the terms. For this reason, the concept of strategy is characterized by a definitional ambiguity. In principle, certain core characteristics or criteria of the concept of strategy can be found in the literature, which allow a more detailed terminological specification and classification. In terms of marketing strategy, Becker (2013), for example, mentions the medium- to long-term character, the steering performance, or the structure-determining characteristics as central criteria of strategy. In contrast, Kotler et al. (2015), for instance, focus more on the importance of practically applicable principles in the context of goal attainment. Ansoff (1965) mentions the externally directed character as a general characteristic. Hofer and Schendel (1978) perceive the development of resources as well as the interaction with the environment as core characteristics of strategy. By combining the above-mentioned criteria with the previous explanations, the concept of strategy can be formulated as follows. Definition of Digital Business Strategy (Wirtz 2001a, 2020b) Against the background of substantial evolutionary dynamics, digital business strategy can be defined as a mostly medium-term direction of corporate behavior that takes into account external market and competitive conditions, resource dispositions, as well as core competencies, ultimately serving to achieve sustainable competitive advantage. The development of a digital business strategy therefore requires the integration of existing strategy concepts within the enterprise. In contrast to traditional strategic management, digital strategy should also take into account the efficient use of innovative and technology-based methods and tools (Chaffey et al. 2019). The corporate strategy is influenced by the corporate vision, corporate mission, and corporate goals. The digital business strategy is basically developed and updated on the basis of the corporate strategy. A specific digital business vision, digital business mission, and digital business goals can be defined strategy analogously. The digital business vision, digital business mission, and digital business goals form the foundation of the digital business strategy that in turn influences the functional strategy in the digital environment. Figure 12.14 illustrates how the digital business strategy fits into the business context.

12.3

Strategy Development in Digital Business

Digital Business Vision

Digital Business Mission

• The digital business vision describes an ideal state in the future that a company intends to achieve •…

• The digital business mission describes the essential purpose or mission that a company is pursuing •…

441

Digital Business Goals • Digital business goals describe the concrete future state of a company •…

Digital Business Strategy Corporate Strategy

• The digital business strategy defines the medium to long-term digital orientation of a company • The digital business strategy lays the foundations for the digital business models of a company • The digital business strategy defines the necessary digital skills and organizational guidelines of a company •…

Functional Strategy The functional strategy of a company defines digital business sub-strategies in the various functional areas, including: • Procurement strategy • Marketing strategy • Distribution strategy •…

Fig. 12.14 Classification of the digital business strategy in the corporate context. Source: Wirtz (2020b)

Taxonomy of Digital Business Strategy Development Developing a digital business strategy includes all activities with regard to the definition, formulation, description, planning, as well as implementation and audit of strategies. The following section explains the procedure of the individual steps and the related key content that has to be taken into account (see Fig. 12.15). This digital strategy should be aligned with the digital business vision, the digital business mission, the digital business goals, as well as the concrete business situation. The development of a digital business strategy is based on strategic initiatives in companies, which have a decisive influence on the further development of the respective company.

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Digital business target plan • Vision • Mission • Targets

12

Digital business situational analysis • Assessment of internal factors • Assessment of external factors

Digital business strategy formulation • Derivation and assessment of strategic options

• Digital business strategy selection and determination

Digital Business Strategy

Digital business strategy implementation

• Implementation/ realization plan • Resource allocation to initiatives

Digital business strategy audit

• Performance control • Strategic control

• Change management

Fig. 12.15 Taxonomy of digital business strategy development. Source: Wirtz (2010b, 2020b)

Digital Business Target Plan The starting point of the digital business target plan is the formulation of the digital business vision. Here, a vision refers to the central theme or the guiding principle of a company’s activity, in other words, an idea of how a business should look like in the future and which future reality the company pursues. Characteristic examples of vision statements are “to make people happy” from Walt Disney or “to organize all of the data in the world and make it accessible for everyone in a useful way” from Google. Apart from that, a vision should fulfill a meaningful, motivating, as well as actionguiding function. Depending on the content, a vision may comprise four groups: (1) target focus, pursuing a future target state; (2) change focus, modifying basic organizational principles; (3) competitor focus, outperforming a competitor; or (4) role focus, becoming a role model (Müller-Stewens and Lechner 2011). The aspects shown in Fig. 12.16 usually represent the essential functions of a corporate vision (content based on Müller-Stewens and Lechner 2016; Welge et al. 2017). Besides the above-mentioned aspects, especially the manager’s assessment with regard to the future development of information and communication technology is important. Companies also need to consider digital business-related technological changes and breakthroughs that may influence online service provision (Deitel et al. 2001). For example, it must be considered to which extent competitors can achieve advantages through the use of the Internet, the extent to which the industry is characterized by intermediaries and/or B2B marketplaces, the extent to which technological developments are relevant to product development, or the extent to which there is a risk of new market participants or substitutes (Chaffey et al. 2019). In addition to the digital business vision, the digital business strategy formulation requires to elaborate a mission statement. The digital business mission differs from the vision, as it does not focus on a desired future state of the company but defines a core statement regarding digital business purposes, values, and standards of conduct (Grant 2005). Thus, the definition of these core principles not only determines the digital business system’s reason to exist but also which services or products are to be

12.3

Strategy Development in Digital Business

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Digital Business Vision target focus, change focus, competitor focus, role focus

Meaningful • Complexity reduction • Guidance • Influencing the operation logic

Motivating

Guide to action

• Presentation of a desirable picture of the future

• Derivation of collectively coordinated actions

• Creation of enthusiasm and motivation

• Setting priorities for action

Fig. 12.16 Digital business vision. Source: Wirtz (2010b, 2020b)

provided. This maxim may also represent an expression of a permanent, actionguiding set of values that specify a framework of appropriate behavior or organizational conduct for internal stakeholders. Consequently, the digital business mission statement is the primary guiding principle, contributing to meet online service provision demands of people and businesses. Based on the digital business vision and mission, the next step refers to deriving and operationalizing concrete organizational targets. By using clearly formulated targets, companies can influence the long-term organizational development. Thus, concrete targets fulfill a coordinating role within the organization, allowing them to focus activities on particular planning specifications. In this context, targets refer to a normative idea about a future state of the company. Effective target setting requires two vital aspects: target formulation and target content. Concerning target formulation, managers usually follow the approach of defining SMART targets (Hill et al. 2014). Here, SMART is a mnemonic acronym that provides criteria to guide target setting. The letters stand for Specific (clearly define area for improvement), Measureable (make the objective quantifiable/traceable), Assignable (specify the responsible person), Realistic (targets need to be achievable with the available resources), and Time-related (specify when the target needs to be achieved) (Doran 1981). The two best-known approaches in terms of goal setting—the shareholder value approach and the stakeholder value approach—are presented below. In terms of business objectives, the fundamental business objectives such as profit, turnover, cash flow, return on assets (RoA), return on investment (RoI), and value enhancement also apply to digital business as the overarching objective for all digital business activities. According to the shareholder value approach, the reason for this striving is the fact that efficient, profitable companies have better prospects for the future and survival and pay higher dividends in the long term, thus leading to

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Primary Stakeholders

Secondary Stakeholders

• Actors with direct corporate involvement

• Actors with indirect corporate involvement

• High influence on entrepreneurial activities

• Affected by the activities of the company

• Shaping corporate strategies and decision making

• Partially shaping corporate strategies and decision making

• Usually operate within the relevant market

• Acting within and outside the relevant market

• …

• …

• Shareholder

• General public, society

• Employees (regional differences)

• Government, politics (local, national and global)

• Customers (B2B, B2C, Retailer)

• Lobby groups

• Vendors, traders, retailers • Suppliers, logistics partners

Amazon.com

• Media, opinion leaders

• Competitors (e.g. Bol.de, Google Books)

• Interest groups, NGOs (e.g. youth protection, environmental protection)

• …

• Trade unions • …

Fig. 12.17 Primary and secondary stakeholders of Amazon. Source: Wirtz (2020b)

Non-Market

Market

a higher demand for company shares that ultimately results in capital appreciation (Hill et al. 2014). In this context, the primary task of a company is the satisfaction of the financial interests of its shareholders. In this regard, shareholders are the legitimate owners of the company as they provide equity. Compared to debt capital, the contribution of equity is associated with significantly higher risks. Against this background, it is understandable that the company’s objectives are primarily aligned with the expectations of its shareholders. With regard to the shareholder value approach, long-term thinking plays an important role. This is especially true for companies active in digital business. The fatal consequences that it can have if a digital business enterprise is not geared to long-term success were clearly observed in 2000 in the context of the burst of the dotcom bubble. In contrast to the shareholder value approach, the stakeholder value approach explicitly takes into account the interests of the company’s other stakeholders (employees, suppliers, society, state). In order to systematically take the interests of the various stakeholders into account, it is first necessary to identify the relevant stakeholders of the respective company. For reasons of systematization, stakeholders are usually divided into primary (market-related) stakeholders and secondary non-market stakeholders (Lawrence and Weber 2014). In this context, Fig. 12.17 shows the distinction between primary and secondary stakeholders using the example of Amazon (content based on Lawrence and Weber 2014; Wirtz 2010b).

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Since taking into account every stakeholder group is generally neither constructive nor realistic, the identified stakeholders require further specification according to their inherent target and power structure (Welge et al. 2017). The key objective of this task is to identify the agenda of the individual stakeholders. In addition, it is important to assess—depending on the power structure of the respective stakeholder—the potential influence that stakeholders can exert on the initiative or organization. Based on this analysis, the final step is to determine how stakeholders relate to the overall digital business targets, which in summary defines if they have to be considered in the target formulation. In terms of goal setting, it can be summarized that the primary strategic objective of a company is to ensure its viability and thus its long-term profitability (Grant 2016). However, studies in descriptive goal research show that a focus on purely financial goals and the associated maximization of profits is not enough. Each goal should take into account the legitimate claims of all stakeholders of the company (Müller-Stewens and Lechner 2016). For example, through its “Going Green at Google” initiative, Google clearly acknowledges its social responsibility with regard to environmental protection (Google 2015b). As part of this initiative, Google seeks to minimize the negative impact of its business on the environment. Google, for example, focuses on the efficient use of energy and data centers in its efficient computing campaign and is also heavily involved in the conversion of energy from coal and oil to renewable, green energies. Finally, Fig. 12.18 shows examples of the goals of digital strategies. These include, for example, increasing digital data protection, improving digital transparency, assuming digital responsibility, and promoting digital open innovation. In addition, digital customer loyalty and its improvement are other crucial goals in digital business. The first goal to be achieved with digital strategies relates to increasing digital data protection. In order to meet the growing privacy expectations of customers, it is important to anchor digital data protection within corporate strategy. The second goal deals with the improvement of digital transparency. By implementing appropriate strategies, companies can deal with the growing need for transparency in the digital age. In addition, a strategy based on transparency helps to identify and prevent corporate misconduct at an early stage. The third objective concerns the responsibility of companies to shape the digital change. To achieve this goal, companies must become aware of their responsibility with regard to digitalization. In this respect, digital technologies should be used primarily for the benefit of people. In a broader sense, companies should always adopt a critical approach when they implement new technologies. For example, artificial intelligence undoubtedly provides substantial advantages for companies and society. However, companies should not ignore risks of this promising technology when formulating their strategy. Fourthly, the strategic objective of promoting open innovation can also be a goal of digital strategy. In this respect, companies can align their innovations directly with external demands and integrate customers into the innovation process. Furthermore, by strategically considering open innovation, they can reduce costs compared to conventional innovation strategies and exploit the innovative power of external actors.

• Enabling digital transparency for customers • Anchoring of digital transparency in the corporate culture, structure and processes • …

• Enabling digital privacy for customers • Anchoring of digital data protection in the corporate culture, structure and processes • …

Assuming digital responsibility • All corporate units have responsibility for shaping the digital change • Anchoring of digital responsibility in the corporate culture, structure and processes • …

Fig. 12.18 Goals of digital strategies. Source: Wirtz (2020b) Promotion of digital collaboration • Promotion and improvement of digital collaboration within a company • Anchoring of digital collaboration in the corporate culture, structure and processes • …

Development of digital competencies • Training and development of the digital competences of the business units • Embedding digital competencies in the corporate culture, structure and processes • …

Improving digital customer loyalty

• Improvement of customer loyalty through targeted digital offers and services • Anchoring of digital know-how in the corporate culture, structure and processes • …

Goals of digital strategies

Improving digital transparency

Increasing digital data protection

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• Introduction and transfer of digital know-how by qualified employees • Anchoring of digital know-how in the corporate culture, structure and processes • …

Protection of digital know-how

• Organizational development through open innovation approaches • Anchoring of digital open innovation development in the corporate culture, structure and processes • …

Promotion of digital open innovation

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The fifth goal that digital strategies can be directed at is improving customer loyalty. With the help of digital technologies, services and products can be offered more precisely, thus increasing customer loyalty. Sixthly, a digital strategy can aim at developing digital competencies. By integrating training into their digital strategy, companies can promote the emergence of these organizational competencies. The seventh goal of digital strategies refers to digital collaboration. Digital technologies enable collaboration regardless of time and place. As soon as companies consider the potentials of digital collaboration when designing their digital strategy, they can benefit from significant efficiency gains. As the eighth goal of a digital strategy, companies can focus on protecting their digital know-how. In an increasingly transparent and digital environment, companies must ensure that digital know-how remains within the company and does not benefit competitors. With regard to internal company processes, the development of digital skills among employees and the promotion of digital collaboration within the company should be mentioned. In addition, the preservation of digital know-how represents a further goal in digital business. These goals should be reflected and implemented in the corporate culture, the corporate structure, and the various corporate processes. Before concrete strategic options are addressed in more detail, the next step in the digital business strategy development process is an analysis of the internal and external influencing factors in digital business.

Digital Business Situational Analysis The second step of developing a digital business strategy is the situational analysis of digital business. Since the situational analysis is a fundamental framework in developing a strategy, this step requires special attention. The situational digital business analysis proceeds in two streams, an analysis with an internal orientation and an analysis with an external orientation (Andrews 2003). The internal analysis includes the examination of the company’s internal resources and processes as well as activities on the market. The external analysis includes an examination of the business environment at the micro- and macro-level. While the micro-level analysis refers to investigating stakeholder demands and provider behavior, the macro-level relates to analyzing demand structures and regulatory conditions (Chaffey et al. 2019). The internal analyses as well as the analysis of the competitive situation can then be condensed into a company-oriented analysis of strengths and weaknesses, which shows the competence-pull forces of the relevant company. Environment and market analyses are combined into an opportunity and risk analysis that shows the marketpush forces in the corporate context (Müller-Stewens and Lechner 2016). A comparison of the two analyses finally allows a well-founded assessment of the company’s situation and the choice of appropriate strategy options. Figure 12.19 presents an overview of the situational digital business analysis.

• Stakeholder needs

• Demand behavior

Internal analysis

• Processes

• Core competencies

• Resources

Competence / resource analysis

• Identififcation of advantages and disadvantages in comparison to other top-tier digital business providers

• Adjustment with strengths and weaknesses profile

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Fig. 12.19 Elements of the situational digital business analysis. Source: Wirtz (2010b, 2020b)

• Comparison with other digital business providers

• Identification of supply and demand developments

Strengths-weaknesses analysis

• Behavior of similar digital business providers

• Activities of similar digital business providers

Supply analysis

Digital business situation

Demand analysis

• Demand structure

Chance-risk analysis

• Technology environment

• Social environment

• Economic environment

• Political and regulatory environment

Environmental analysis

External analysis

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The internal view focuses on analyzing internal resources, competencies and processes, as well as the activities and the behavior of similar digital business providers. In this context, companies should try to identify and differentiate their own market-relevant resources and capabilities (Wirtz 2000f). Here, resources are understood in terms of the classic productive factors, i.e., work performance, operating resources, and materials. In contrast, capabilities are defined as the so-called dispositive factor that enables the value-creating combination of production factors. Here, the core capabilities are of special importance. These capabilities should be available internally, as the value creation would not be possible without them. The digital potential of existing products and services of the company are particularly important for digital business (digital business fit of products and services). If an acceptable online position already exists, it can be used as a basis for further endeavors. If not, it must be assessed to what extent a company’s product range is suitable for digital business. For example, over-the-counter drugs can be sold quickly and easily over the Internet. This can represent an additional income for traditional pharmacies on the Internet (e.g., Aponeo.de, Aporot.de) or even a business model of its own (e.g., DocMorris, Sanicare). Just as the resources and competencies in the own company are examined, the competencies and resources of competitors must also be considered in a further analysis step. In this context, the competitive behavior and the market activities of competitors are of particular importance (Müller-Stewens and Lechner 2016). If sufficient information is available, each competitor should be analyzed in terms of objectives, strategies, and capabilities. In a highly fragmented market, it is appropriate to focus on the strongest, best-known, and, due to their innovativeness, youngest competitors. In addition to the traditional criteria such as key performance indicators and customer opinions, digital information sources such as homepages, communities, chat rooms, and blogs also represent an important source of information. This analysis should result in a competitor profile that allows concrete statements about relevant success factors with regard to product, technology, management, processes, strategy, finances, marketing, market access, customer service, and networks. Based on this analysis, a consideration of strength and weakness can be carried out, which serves as a comparison between the own company and the relevant competitors. The aim is to identify and evaluate existing advantages and disadvantages in comparison to these competitors in order to determine the future strategic orientation of the company. When analyzing the micro-environment of the company, customer needs and customer behavior must be considered first, as they fundamentally determine demand. Such a user segmentation is of particular importance in digital business, where customers exhibit very specific purchasing behavior. The aim of such user segmentation is to create transparency with regard to the effect of marketing measures and environmental factors on the actual purchasing behavior of users. The overriding goal of user segmentation is therefore to address

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customers and their particular needs more specifically. When classifying customers into market segments, it is important to ensure that each customer group is as homogeneous as possible, while the individual groups should be highly heterogeneous compared to each other. Table 12.1 shows criteria for customer segmentation enriched with aspects relevant to digital business. At the macro-level of the environment analysis, market structures and regulatory conditions are particularly important. In terms of market structures, the object of analysis is the investigation of general conditions on which the company has a direct or at least indirect influence. These are the structures of all markets that are relevant to the respective company, such as the procurement market, the sales market, or the market for employees. Table 12.1 Criteria for customer segmentation Type of Criterion Sociodemographic Criteria

Psychographic Criteria

Behavior-Based Criteria

Geographical Criteria

Source: Wirtz (2020b)

Differentiation Criteria for the Digital Business Consumer Goods Market • Gender • Age • Family status • Profession • Education • Income • Household size/number of children • Lifestyle • Religion • Nationality • ... • Personal characteristics • Attitude • Behavior • Expected benefits • Usage rate • Usage status • Risk appetite • ... • Usage rate • Usage status • Price behavior • Media behavior • Brand loyalty • ... • State • Federal state • Place of residence • Administrative district • Purchasing power district • Function room • Catchment area • ...

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In this context, the 5-forces framework proposed by Porter (1980) can be applied. It represents the decisive market economy influencing factors for value creation and corporate success. Porter focuses only on factors external to the company (marketbased view) and thus complements the internal company concept of the resource and capability perspective with an external view. Porter differentiates between the five key competitive forces shown in Fig. 12.20, which also illustrates the basic structural conditions of digital business (content based on Porter 1980; Jelassi and Enders 2008; Wirtz 2010b; Chaffey et al. 2019). The final step in the strategic analysis is to identify conditions that the company cannot influence. These are all forms of regulatory, economic, societal, technical, and social factors that determine the company’s scope of action. At the regulatory level, there are, for example, data protection guidelines and due diligence requirements for digital business, particularly with regard to the treatment of minors. At the technical level, for example, the various protocols for encryption can be mentioned. Moreover, the purchasing power of Internet users could be identified as a social influencing factor. This becomes evident when considering the relatively young age of Internet users. New providers • Low barriers to market entry • High advertising costs • Many Web 2.0 companies/Internet startups • Steep learning curve/simple imitation • Unclear legal situation/missing IP protection makes it easier for followers (e.g. Facebook)

Suppliers • High buyer concentration weakens suppliers • Fragmentation of suppliers / specialization (OEMs) • Market transparency • Standardized products with low differentiation potential (for example webmail) • Low switching costs/weak network effects

Industry competition • Market dominance of fewer players (Amazon, Google, ...) • Hardly any possibility for product differentiation • Short product life cycles • Many hypes about short-lived trends • Global market with an unmanageable number of competitors • High fixed costs/many unused capacities • High strategic relevance/image impact

Customer • High consumer power

• Price transparency/price comparisons • User empowerment through product reviews • Lock-in of customers hardly possible • Low switching costs

Substitutes • High threat level through innovation due to rapid dissemination

Fig. 12.20 Competitive forces in digital business. Source: Wirtz (2010b, 2020b)

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Opportunities and threats on the market can be identified on the basis of customer requirements, market structure, and environment analysis. Such an analysis provides information about the opportunities and risks induced by market dynamics and competition. Comparing the opportunity-threat analysis and the strength-weakness analysis enables a meaningful assessment of the company’s situation from an internal and external perspective. This information establishes a rational and comprehensive basis for choosing the fundamental strategic options for the digital business system. The aim of this analysis is the identification of trends and market dynamics at an early stage. This helps to evaluate whether these developments concern a strength or a weakness. Based on this information, companies can derive a potential need for action. Figure 12.21 depicts a SWOT (strengths/weaknesses/opportunities/threats) analysis for the company Amazon.

Strengths

Weaknesses

• Profitable company

• Risk of brand dilution due to broad product range

• Excellent customer relationship management • Reliable IT infrastructure • Global brand

• Pure mail order business causes high shipping costs • Dependence on supply services

Opportunities

Threats

• Potential for cooperation (for example with Toys "R "Us)

• Many competitors

• Market opportunities in Asia and Eastern Europe

• Threat from Google Books, Google Shopping etc.

Fig. 12.21 SWOT analysis for Amazon. Source: Wirtz (2010b, 2020b)

Digital Business Strategy Formulation The third step of developing a digital business strategy is its formulation. The achieved results of the formerly conducted analyses concerning the company’s situation enable companies to define their desired digital business strategy. For this purpose, it is necessary to be aware of the generally available strategic digital business options—how the digital service may be provided from a strategic perspective—to reasonably evaluate and determine the deducted strategy in the next stage.

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According to Porter (1980), there are generic market and competitor strategies that successful organizations consistently follow. A market strategy describes the approach that a company chooses to serve the market. The crucial factor in this context is the market share that the respective company intends to cover. In this regard, two extremes are conceivable: According to Porter (1985), an ideal enterprise orients its offers to either a wide or a narrow market field. This means that the company either serves the entire market or concentrates on a market niche. Competitive strategy refers to the strategic focus of a company with regard to the source of its competitive advantage. The market specifics of digital business such as fast innovation cycles, low switching barriers and low variable costs, combined with rapidly changing customer preferences, suggest that competitive strategies should be pursued that lead to economies of scale as quickly as possible. Porter distinguishes two types of competitive advantage in this context: lower costs and differentiation. With regard to the possible combinations, six ideal types of market and competitive strategy arise. Porter (1985) calls the strategy options in the “corners” of the matrix “generic” strategies. According to Porter, the hybrid strategies that do not directly aim at cost leadership or differentiation, but pursue some kind of combination, usually do not have a competitive advantage. He calls these companies and companies that cannot commit themselves to one market “stuck in the middle.” The two generic strategy types of cost leadership and differentiation can be planned and realized both in the total market and in niche markets. A company that can produce more cheaply than others and achieve the same sales prices generates above-average returns. An example of such a strategy can be found in online shops that offer only one product per day for a low price (e.g., 1dayfly.com). Companies that pursue a differentiation strategy can have above-average success because they satisfy customer needs better than competitors. This leads to an increased buying preference and enables a price premium. While information is provided ubiquitously and usually free of charge on the Internet, specialized and renowned niche providers may charge fees for the retrieval of information. According to Porter, differentiation measures generally lead to additional costs, whereas the aim of the cost leadership strategy is precisely to avoid such additional costs that are not related to the product. If a company combines a differentiation strategy with a cost reduction strategy, their (opposing) effects usually neutralize each other and the company has no competitive advantage. However, there are exceptions to this rule: according to Porter, a company with a hybrid strategy can be successful if (1) it can benefit from strong economies of scale or scope or if (2) it has a significant innovation. It is therefore not surprising that hybrid strategies can be successful in a digital business market with strongly digressive or nonexistent unit costs. Thus, there is a

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large number of companies that are successful with a hybrid strategy due to the opportunities offered by the Internet. For example, Dell offers a wide range of computer systems for private and business customers, which differ significantly from competing products in that the systems are freely configurable. By optimizing warehousing, assembly, and shipping, costs can be kept so low that the end devices are very inexpensive. The strategic environment of digital business is also characterized by a high degree of innovation that not only forces companies to consistently innovate but also opens up the possibilities of a hybrid strategy. One example is the company Threadless.com that has individual, user-created T-shirt layouts rated by its community, which the company then produces in large quantities and sells for around 25 USD. It is therefore not a cost leader—comparable T-shirts of the Old Navy brand cost around 15 USD—nor a differentiation leader because the German company Spreadshirt, for instance, also offers individually designed T-shirts (threadless 2020). Since Porter’s concept, which is considered a central strategy paradigm in traditional business administration, hardly addresses the hybrid strategies particularly relevant to digital business, a multitude of approaches and systematics for strategies in the digital business context have emerged since the New Economy boom. Table 12.2 presents these new strategy options. Digital service leaders are characterized by customer-oriented and reliable service delivery. Their core competencies are the provision of a broad and deep range of digital services and the user-oriented execution of the respective service. In addition to direct revenues and performance-based compensation, companies that pursue the strategy of service leadership also use usage, basic, and setup fees for their revenue generation. The success of these companies essentially depends on the service competencies and the interaction ability of the service provider. In this context, the car-sharing provider SHARE NOW can be mentioned as a joint venture of BMW and Daimler. SHARE NOW pursues a service leadership strategy by combining the technical competencies of two automotive companies and using them to provide a comprehensive, customer-oriented, and reliable car-sharing service. In terms of digital quality leaders, the primary focus is on the value of the service offering. The premium quality of products and services can refer to the digital process, product, or service quality and is usually accompanied by a corresponding brand image. The digital quality leader generates transaction revenues, ad sales, or big data/data mining revenues, among others. Thus, the success of digital quality leaders is primarily based on the effective realization of premium prices and customer-oriented quality development, planning, and improvement. In the digital context, Google’s search engine in particular stands out for its high-quality functionality.

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Table 12.2 Competitive strategies in digital business Strategy Service Leader

Quality Leader

Price Leader

Assortment Leader

Key Aspects • Very high customer focus/ customer orientation • Reliable service provision • Service orientation as a core competence • User-oriented breadth and depth of the offer • ... • Focus on the value of the range of services • Focus on the range of services • Brand image premium quality • Focus on process, product, and service quality • Breadth and depth of qualitative offers • ...

• Scale- and alliance-oriented business model • Differentiation via the lowest/best price • Coincidence with cost leadership • Focus on cost reduction • No-frills concepts • ... • Focus on the most diversified range of products and services in order to address a large number of different target groups

Revenue Generation • Direct revenues through value-added services • Pay-forperformance • User fees • Setup fees • Basic fees • ... • Transaction revenues • Connection fees • User fees • Setup fees • Basic fees • Ad sales • Big data/ data mining revenues • ...

• Transaction revenues • Connection fees • User fees • Setup fees • Basic fees • ...

• Transaction revenues • User fees • Basic fees • Ad sales • ...

Success Factors • Service reliability • Service expertise • Understanding of the service provider • Service responsiveness • ...

Examples • Share-now. com • Deliveroo. com • ...

• Realization of premium prices through performance advantages • Customeroriented quality development and planning • Continuous quality improvement • Quality-oriented organizational practices • ... • Consistent exploitation of cost reduction • High market shares • Efficient use of cost degression effects due to large quantities • ...

• Google.com • Sap.com • ...

• Broad and deep product range • Consideration of the needs of different (also smaller) target groups/customer segments

• Amazon. com • Spotify.com • Netflix.com • ...

• Mintmobile. com • Xfinity.com • ...

(continued)

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Table 12.2 (continued) Strategy

Key Aspects

Revenue Generation

• “Long-tail” effect • ...

Personalization Leader

• Distinguished by a high degree of user-defined and customizable offers • Individual customer approach and orientation • Individual/group data mining • ...

• Transaction revenues (individual prices) • ...

Information Leader

• Dominant position with regard to the completeness, relevance, and credibility of the information provided • Focus on accessibility, security, and usability of information • ... • Focus on the communication with customer/ stakeholder groups • Communication touchpoints • Customer/user interface forms • ...

• User fees (in the form of pay-peruse) • Basic fees (in the form of subscriptions) • Ad sales • ...

• Focus on interactive customer needs • Manage the interactions of third-party vendors and multiple customers

• Commissions • ...

Communication Leader

Interaction Leader

• Ad sales • Big data/ data mining revenues • ...

Success Factors • Variable and multifaceted customer approach • ... • Provision of customer-oriented product/service configurators • Effective exploitation of technological opportunities in the configuration of products and services • ... • Effective and efficient provision of informative content • Customercentered/ personalized information offer • Use of different distribution media (multichannel) • ... • User-oriented design of the graphical user interface • Multiple communication • Guarantee of data security • High communication responsiveness • ... • Effective and efficient handling of the service relationship between thirdparty providers and their customers

Examples

• Mymuesli. com • Nike.com/ nike-by-you • ...

• Reuters.com • Dpa.com • ...

• Twitter.com • Youtube. com • ...

• Uber.com • Airbnb.com • ...

(continued)

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Table 12.2 (continued) Strategy

Cooperation/ Network Leader

Scale Leader

Innovation Leader

Key Aspects • Traditional providers are forced to buy information from the interaction leader • ... • Control and mediation competence in cooperative networks • Focus on interorganizational relationships • Creating the opportunity of informational exchange in crossorganizational networks • ... • Mass market focus • High degree of automation in services and production • High economies of scale and scope • Production volume increases faster than production costs • ... • High degree of creativity and innovative power • Innovation advantages • First-to-market strategy • First-mover advantage • ...

Source: Wirtz (2020b)

Revenue Generation

• Ad sales • Big data/ data mining revenues • Basic fees (for premium users/ professional users) • ...

• Transaction revenues • Basic fees • License fees • ...

• Transaction revenues • User fees • Patent/ license fees • ...

Success Factors • Provision and development of interactionoriented interfaces • Achieving high market shares • ... • Demandoriented provision and development of effective and efficient cooperation platforms • Design of the cooperation interfaces • Ensuring the accessibility and security of the network • ... • Consistent exploitation of cost reduction potentials • High market shares • Efficient use of cost degression effects due to large quantities • Broad and deep product range • ... • Innovationoriented organizational practices • Customeroriented innovations • Promotion of innovation • High R&D share • Innovation cooperations • ...

Examples

• Dropbox. com • Google. com/drive • ...

• Microsoft. com/en-us/ windows/ • Sap.com/ services/ cloud • ...

• Apple.com • Tesla.com • ...

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The strategy of digital price leadership can be distinguished from other strategic directions by the low price. A digital price leader focuses on strict cost management. Here, revenues can be achieved, for instance, by generating transaction revenues or user fees. This implies that digital price leaders can offer both digital products and digital services. The success of companies striving for price leadership depends, among other things, on high market shares and the efficient exploitation of cost digression effects. An example of a digital price leader is the mobile communications provider Congstar (a subsidiary of Deutsche Telekom), which is pursuing a strategy of digital price leadership in the mobile communications market. Digital assortment leadership describes a strategic direction that is based on the greatest possible assortment width. Assortment leadership can be pursued both in niche markets and in the total market. A typical feature of a digital assortment leader is the so-called long tail. According to the long-tail thesis, digital providers generate their sales with a large number of niche products. Revenue can be generated through transaction fees as well as land charges or user fees. A broad and deep product range and the consideration of different customer segments are relevant for success. In addition, a variable and versatile customer approach can support market success. A typical example is the music streaming service Spotify, which offers a whole range of different music styles and genres for large and small target groups. Digital personalization leaders are characterized by a high degree of user-defined and customizable products or services. Accordingly, companies that pursue the strategy of personalization leadership are geared toward the best possible adaptation to customer needs. Personalization leaders generate their revenues through traditional transactions. In this regard, the provision of a customer-oriented product or service configurator is particularly important to success. Against this background, Mymuesli.com, for example, advertises with the individual configuration option of a breakfast cereal. The customer can select online from approximately 80 ingredients and thus has a large number of different muesli variations to choose from. However, new market participants who can offer a more individual and comprehensive product experience, for instance, by using newer technologies, represent a central risk to personalization leadership. For this reason, digital personalization leaders should continuously adapt their product or service configurators to the technological possibilities offered in order to fully exploit the individualization potential of their products or services. The strategy of digital information leadership aims to provide customers with the most up-to-date, comprehensive, and reliable information at all times. The core aspects of this strategic orientation are the quality of information and the focus on the accessibility and security of this information. Possible revenue models include advertising revenues as well as user fees (in the form of pay-per-use offers) or basic fees (in the form of subscriptions).

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In addition to the effective and efficient provision of high-quality content, a customer-centric information offering and the use of various distribution media are critical for the success of this strategic orientation. Digital newspapers, for example, increasingly use podcasts or online live broadcasts. In this context, the news site reuters.com is known for its up-to-date, qualitative, and serious reporting. To maintain this market position, fast and reliable access to adequate information by digital information leaders is essential. Digital communication leaders differentiate themselves through their close exchange with the respective customer or stakeholder groups. They often have so-called communication touchpoints that offer customers the opportunity to get directly in touch with the company or other customers. These contact points are particularly pronounced in the case of digital communication leaders and form an essential element of value creation. Revenues are typically generated through advertising revenues or big data/data mining revenues. As this form of revenue generation requires a large number of users, it demands an adequate design of the graphical user interface as well as the appropriate use of multiple communication channels. If these factors meet the expectations of the customers, a special user experience is created that ultimately determines the success of digital communication leaders. A typical example of digital communication leaders is twitter.com that promotes the exchange with customers and between customers via interactive platforms. Companies striving for digital interaction leadership focus on managing the interactions between their own company, third parties, and customers. Accordingly, they ensure that a service relationship is established between these parties and is handled accordingly. Third parties who wish to draw on the reach and expertise of the interaction leaders are usually required to pay a commission. The success of digital interaction leaders essentially depends on the effective and efficient handling of service relationships between third-party providers and their customers and the provision of interaction-oriented interfaces. Uber, for example, offers an online platform that places passengers with private or commercial taxi drivers and ensures the appropriate provision of the service. Digital cooperation or network leaders primarily focus on the control and mediation in cooperative networks. In addition, they usually enable an interorganizational exchange of information that facilitates communication beyond company boundaries. Digital cooperation or network leaders generate their revenues in particular through advertising revenues, big data/data mining revenues, and basic fees for premium or professional users. Critical success factors of digital cooperation or network leaders are, among others, the demand-oriented provision and development of effective and efficient cooperation platforms and the guarantee of security within the network. For example, the file-hosting service Dropbox is based on several security levels in order to

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ensure that relevant data is only visible to the intended network and to guarantee data protection for all network participants. Digital scale leaders exploit economies of scope and scale and focus on mass markets. In principle, they generate their revenues through transaction revenues or basic fees. For example, software manufacturers generally charge basic fees or license fees for the use of their software packages over time. The success of digital scale leaders primarily depends on high market shares and the efficient use of economies of scale through the production of large quantities. The strategy of digital scale leadership is often achieved by software companies like SAP or Microsoft. Since the marginal costs of software production are relatively low, it is suitable for achieving economies of scale and scope. Digital innovation leaders are characterized by their high degree of creativity and innovative power. In order to gain a first-mover advantage, they try to be the first on the market with their innovation. In addition to transaction revenues and user fees, digital innovation leaders often also rely on patent or license fees to generate revenue. Crucial success factors of digital innovation leaders are innovation-oriented organizational practices and continuous customer orientation along the innovation process. A typical example of a digital innovation leader is Apple. Apple has very successfully established itself as a first mover in many digital-based markets with innovative products and services, such as iTunes, the iPhone, or the iPad. In addition to the above-mentioned competitive strategies in digital business, it is also possible to differentiate various dimensions of a digital business strategy. In this context, the strategy construct in digital business was examined more closely by Wirtz et al. (2007). Based on industrial economics and the striving of a digital business for an attractive industry structure or an adequate strategic positioning in the digital business sector, the dimensions product differentiation, image differentiation, aggressiveness, and focus were derived. Furthermore, based on the resource theory and the striving of a digital business enterprise for a superior resource endowment and competitive organizational capabilities/processes, the dimensions proactivity, replication, reconfiguration, and cooperation could be derived as further dimensions of the digital business strategy. Figure 12.22 provides an overview of the underlying conceptualization of the construct strategy in digital business (content based on Wirtz et al. 2007). In order to be able to make a meaningful selection of strategic options, a corresponding evaluation based on selected criteria is necessary in advance. In this context, the most frequently used evaluation criteria in literature and in practice are expediency, goal attainment, feasibility, and fit of the digital business policy (Müller-Stewens and Lechner 2016). The evaluation criterion of expediency serves to assess to what extent the digital business strategies are suitable for achieving the respective objectives. In particular, it is important to determine the strengths and weaknesses of the digital business strategy.

12.3

Strategy Development in Digital Business

461

Strategy in digital business

Competitive advantages due to: • Attractive industry structure • Strategic positioning in the industry

Proactivity

Competitive advantages due to:

Aggressivenes

Replication

Image differentiation

Reconfiguration

Product differentiation

Cooperation

• Superior resource allocation • Organizational capabilities/ processes

Resource theory

Industrial economics

Focus

Fig. 12.22 Strategy in digital business. Source: Wirtz (2020b)

It has to be verified whether the digital business policy takes into account the interests of all relevant stakeholders and whether the digital business policy is compatible with the business logic. Thus, the extent to which the digital business policy strategy is in line with the pursued digital business vision and mission must also be taken into account. In contrast to expediency, the evaluation criterion of goal attainment usually focuses on the assessment of the financial performance. For this purpose, there are a number of different procedures. Almost all of them have in common the ability to calculate the financial success of a strategy by means of various key figures. The most widely used method in this context is the discounted cash flow approach, in which expected future payment surpluses are discounted to the valuation date by means of the cost of capital (cash value). A major advantage of such an analysis is the good comparability, which is guaranteed by clearly defined calculation formulas. However, it is problematic that such value analyses have difficulties to anticipate future market and company developments. Due to the predominant dynamics of digital business, this point of criticism is particularly significant in the Internet economy (Welge et al. 2017). The evaluation criterion of feasibility refers to the elementary question of the necessary resource input to successfully implement the pursued strategy. In addition

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to material resources, this affects the entrepreneurial skills and knowledge required to successfully implement a digital business strategy in the marketplace. For example, if a company wants to expand globally in the field of e-commerce, this requires not only appropriate IT skills but also country-specific knowledge (e.g., legal situation, customs, language skills, distribution skills). The last evaluation criterion concerns the fit of the digital business policy. This refers to the complementarity between the digital business strategy and the respective measures. In particular, digital business strategies that consist of several elements must be analyzed and evaluated according to their fit. Here, it must be analyzed to what extent the individual elements of the digital business strategy fit together (intra-digital strategy fit) and to what extent the elements of the digital strategy harmonize with the connected system components (digital strategy system fit). Finally, it must be examined whether the digital business strategy elements of the entire system are consistent both internally and externally (intra system fit) (Scholz 1987b). The individual strategic options available can then be evaluated on the basis of the evaluation criteria presented. Figure 12.23 shows an example of an evaluation matrix that can be used to systematically evaluate and compare the relevant digital business strategies. On this basis, a selection of the digital business strategy to be pursued can be made, which has to be implemented in the next step of the digital business strategy development process.

Evaluation Criteria

Achievement of the digital business strategy objectives

Feasibility of the digital business strategy

Fit of the digital business strategy

Digital Business Strategy 1

Overall assessment per digital business strategy

Strategic Options

Suitability of the digital business strategy

Digital Business Strategy 2 Digital Business Strategy 3

Overall assessment per assessment criterion very bad

bad

neutral

good

very good

Fig. 12.23 Digital business strategy evaluation matrix. Source: Wirtz (2010b, 2020b)

12.3

Strategy Development in Digital Business

463

Digital Business Strategy Implementation Having formulated the digital business strategy, the next step of developing a digital business strategy is its implementation (Yeh et al. 2012). This step serves to implement the formerly defined digital business strategy and accordingly to pursue the desired goals of the digital business strategy. Thus, the digital business strategy implementation phase represents a central element within the digital business strategy development system (Chaffey et al. 2019). The procedure of strategy implementation is an interdisciplinary and crosshierarchical process. Its coordination requires an approach in multiple stages that are subject to an iterative process (Mohapatra 2013). Although the scientific literature on strategy implementation shows different approaches on this topic, these mainly differ with regard to their constituents but generally rest upon a rather similar schedule model (Lucia-Palacios et al. 2014). In the digital business context, subdividing the strategy implementation process into the three classic phases of planning, execution, and control proves to be useful. However, specific success factors arise from the particular characteristics of the digital business or Internet environment that should be considered when implementing digital business solutions. Figure 12.24 illustrates the phases that are associated with digital business strategy implementation. The planning phase serves to determine the key targets of strategy implementation. In addition to specifying the implementation procedure, companies need to assess expense figures in this phase, particularly decisions with regard to budgeting, deadlines, schedules, resources, and milestones (Bernecker 2003). There are various instruments such as network diagrams or detailed workflow schedules in order to implement these plans. Due to the typically extensive planning Digital Business Strategy Implementation • Definition of digital business implementation targets Planning

• Definition of activities, deadlines, delivery dates and budgets • Communication of the defined digital business implementation targets

Execution

• Setup of a web team • Realization of the digital business strategy • Performance analysis to monitor and assess target attainment

Control

• Determine causes of discrepancies and introduction of adjustment measures

Fig. 12.24 Digital business implementation phases. Source: Wirtz (2010a, 2020b)

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effort associated with realizing or implementing digital business strategy concepts, efficient handling of this matter usually requires adequate IT support. Accordingly, companies also need to consider the corresponding resources. On completion of the planning phase, the implementation of a digital business strategy enters the execution phase. Here, companies have to communicate the strategy targets and the respective implementation approach first (Papazoglou and Ribbers 2006). Early communication of these matters, for instance, can support acceptance of the pursued digital business strategy among affected staff. Once the basic structures for implementing the strategy have been created, a project team must be put together that is assigned with the task of executing the digital business strategy implementation plans. Given the online context, recruiting technical experts that possess an adequate level of network, web, and IT expertise is mandatory. Therefore, the project team needs to be equipped with people that have a relevant set of digital business proficiency. However, the selection of a suitable team leader is the most important factor for the success of digital business strategy implementation (Turban et al. 2015). After all, the core process of the execution phase is the actual implementation of the digital business strategy implementation plans and represents the transition from planning to realization. The objective of the control phase of the digital business strategy implementation reflects the transition from the planning to the execution phase. The aim of this final phase refers to evaluating the degree of implementation or how well the desired goals of the digital business strategy implementation have been realized. In this context, companies need to constantly measure and critically examine the interim results and project progress. If necessary, they have to rerun particular parts or tasks of the projects if they have not achieved the desired outcome. Digital business implementation projects usually require certain stages that need to be completed successfully in order to achieve the desired results. In addition, successful project progress demands comprehensive project management on a project leadership level, covering all associated phases. The success of implementing a digital business strategy strongly depends on the specific company, numerous environmental factors, and ultimately the respective strategy. Nevertheless, basic factors and parameters can be identified. Their knowledge and conscientious observance can sustainably increase the success of digital business strategy implementation. Particularly in view of the prevailing dynamic competitive and market environment, it must be ensured that strategy is implemented at a certain speed, while still allowing flexible adjustments (Rayport and Jaworski 2001). In addition to considering the dynamic and competitive market environment of digital business, the success factors of digital business strategy implementation listed in Fig. 12.25 can also be mentioned.

• High utility and usage value of digital services • Good cost/benefit ratio for the utility value offered • …

• Focus on the needs of users of digital services • User-friendliness of the digital service offers • …

System Quality • High visual attractiveness of the website design • Outstanding IT system quality • …

Strategy / Organizational fit

• Differentiated organizational alignment according to the digital strategic guidelines • Integrated digital organizational design • …

Community / Network Quality

• Clear community interaction with regard to the digital service offerings • Comprehensive network with corresponding partner cooperation • …

Service Quality

• High service quality of the digital service offers • High responsiveness and ability to interact • …

Success factors of digital business strategy implementation

Usefulness

Ease of Use

• High degree of individualization and interaction of the digital service offers • Differentiated mass customization of the digital service offers • …

Personalization Quality

• High information quality of digital service offerings • High alignment of the brand characteristics to credibility and reliability of the digital service offers • …

Information Quality

12.3 Strategy Development in Digital Business 465

Fig. 12.25 Success factors of digital business strategy implementation. Source: Wirtz (2020b)

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Finally, Fig. 12.26 shows the ideal scenario of a digital business strategy implementation project. In general, a digital business strategy implementation project has seven phases: conceptual design (conception of the digital business project), technical design (technical translation of the conceptual design), pilot (development of a prototype), rollout, go-live, after-go-live support, and closing (project completion). Moreover, at project manager level, cross-phase project management is necessary. Jan 2022

Feb 2022

Mar 2022

Apr 2022

May 2022

Jun 2022

Jul 2022

Project Management Conceptual Design Technical Design Pilot Rollout

After-Go-Live Support Legend: Go-Live

Closing

Fig. 12.26 Ideal digital business strategy implementation plan. Source: Wirtz (2010b, 2020b)

Digital Business Strategy Audit The final phase of digital business strategy development includes a specific digital business strategy audit. The purpose of this digital business strategy audit is to examine to what extent the previously defined and implemented strategies have the desired effect. Thus, the digital business strategy audit focuses on the premises, implementation, and effectiveness of digital business strategies. Just like in the case of traditional businesses, companies in the Internet economy also need to consider corporate financial fundamental goals, such as profit, sales, EBIT, cash flow, and return on investment (RoI). Therefore, the overriding objective of all digital business activities is to ensure the long-term profitability in order to permanently satisfy the shareholders’ financial interests (Hill et al. 2020). Digital business companies can use different profitability ratios and indicators to evaluate a digital business strategy for increasing profitability in terms of performance measurement. Figure 12.27 gives an overview of the most common profitability indicators that can be used for a digital business strategy audit. As already pointed out in the discussion of the target content of digital business, a focus on purely financial targets and the associated maximization of profits falls short. This is especially true for a successful strategy audit of companies active in the

12.4

Summary

467

Calculation

EBIT

ROI

Key profitability indicators

Annual net profit +/- Taxes +/- Interests

Profit/ Total capital (equity + debt)

ROIC

NOPAT/ Invested capital

ROCE

EBIT/ Invested capital

Cash Flow

Annual net profit +/- Non-cash inflows/outflows

Significance • Earnings before interest and tax, Operating profit irrespective of tax and interest • Basis of further key profitability figures • Calculation of the return/efficiency of the total capital employed • Basis of further key profitability indicators • Calculation of the return on adjusted capital invested • Basis: NOPAT (net operating profit after tax) • Calculation of the profitability of the total capital • Basis: EBIT (earnings before interest and tax) • Cash surplus that is freely available for investments, debt repayments, creation of reserves or dividend payments

Fig. 12.27 Digital business key profitability indicators. Source: Wirtz (2010a, 2020b)

Internet economy. In order to be able to systematically consider other dimensions in addition to financial goals, it is advisable to implement the digital business strategy audit with the help of a scorecard approach. This makes it possible to evaluate the performance of a digital business enterprise along several dimensions, each of which is measured by a limited number of indicators (Müller-Stewens and Lechner 2016).

12.4

Summary

• The four forces of digital strategy are convergence, digitization and innovation dynamics, market complexity, as well as customer empowerment. • Convergence can be divided into product/service convergence, business unit convergence, company convergence, as well as sector convergence. • Digital business products and services are significantly influenced by two trends. On the one hand, the dynamics of innovation requires an adjustment of product policy. On the other, digitization enables new forms of products, services, and organizations that are highly relevant in the digital business sector. • Typical market entry barriers that lead to market complexity can occur at the structural, strategic, and institutional level. • The rising transparency and accountability of actions and the possibility that customers can exchange their desires and opinions and unite in social networks

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• • •

• •

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and communities enable customer empowerment. This became possible due to modern information and communication technologies. Digital business value activity systems are based on the concept of the digital value chain that describes a set of organizational activities performed to deliver a product or service to the digital market. The cornerstones of developing a digital strategy are the digital business target plan, the digital business situational analysis, digital business strategy formulation, digital business strategy implementation, as well as digital business strategy audit. A situational digital business analysis includes an environmental analysis consisting of an investigation of the political, regulatory, economic, social, and technological aspects. Moreover, it includes a competence/resource as well as a demand and a supply analysis. The environmental and demand analysis refers to a chance-risk analysis, whereas the supply and competence/resource analysis is important for the strength-weakness analysis. The SWOT analysis represents a strategic evaluation of strengths, weaknesses, opportunities, and threats. The success factors of digital business strategy implementation are ease of use, usefulness, system quality, information quality, service quality, community/network quality, strategy/organizational fit, and personalization quality.

12.4

Summary

Chapter 12 Questions and topics for discussion

Review questions 1. Describe the four forces of digital business strategy and explain how they shape the digital strategy of companies. 2. Explain the determinants of convergence development. 3. Explain the digital business value activity system. 4. Explain the goals and targets of a digital business strategy by means of examples. 5. Name the success factors of digital business strategy implementation.

Topics for classroom discussion and team debates 1. Discuss on the basis of the four forces which force is the most important one. Should customer empowerment on the Internet be applied more extensively by users in order to make Internet companies aware of their preferences? 2. Discuss whether the fast moving digital market even requires a long-term strategy. Is a short-term adaptation not the more effective approach? 3. Debate whether the innovation strategy is the most important competitive strategy and which advantages and disadvantages a systematic innovation strategy has.

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13

Contents 13.1

13.2

13.3

13.4

13.5

Digital Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Digital Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phases of Digital Development and Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Digital Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Traditional Leadership Versus Digital Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Digital Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development Stages of the Digital Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definitions of Digital Teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development Stages of Digital Teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

473 473 475 477 477 478 480 480 481 487 487 489 491

Learning Objectives By working through this chapter, you will be able to: 1. Define and discuss digital transformation, digital leadership, digital organization, and digital teams. 2. Explain the interactive relationships between digital transformation, digital leadership, digital organizations, and digital teams. 3. Distinguish traditional leadership and organizations from digital leadership and organizations. 4. Explain the composition, structure, and technological features of digital organizations. 5. Define and discuss the different development stages of digital teams and digital organizations.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_13

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The diffusion of digital applications has substantially accelerated since the advent of the Internet in the early 1990s. In the meantime, the digitization of the economy and many areas of society has reached an advanced stage. The new technological possibilities of this progressive digitization and the radical market changes caused by new technologies have led to a fundamental conversion of organizational structures and processes.1 This digital transformation is characterized by a change of the value constellation and a digital infiltration of all system-related elements and processes. The digital transformation initially affects the executive level (digital leadership), which then influences the design of the organizational (digital organization) as well as the interaction level (digital teams) of companies. Figure 13.1 provides an overview of the key aspects related to the digital transformation and organization of companies. In this regard, the digital transformation represents the driving force that changes the leadership of organizations and establishes digital mindsets on the management level in the sense of digital leadership. This digital-based leadership affects how work is organized within companies. In addition, it is characterized by the development and introduction of new digital-based organizational forms and structures that lead to the creation of a digital organizational culture.

• Digital alteration of the value constellation • Digital pervasion of all system elements and processes

Digital Transformation

Increasing digital aggregation

Increasing digital specification

•… • Digital transformation leads to a modified management of the organization

Digital Leadership

• Adoption of digital mindsets on the management level •…

Digital Organization

• Digital transformation and digital leadership leads to new organizational forms and structures • Creation of a digital organizational culture •…

Digital Teams

• Digital interactions enable virtual teams to work together regardless of time and location

•…

Fig. 13.1 Digital transformation pyramid. Source: Wirtz (2020b)

1

See for the following chapter also Wirtz (2020b).

13.1

Digital Transformation

473

On the interaction level, the digital networking among organizational units and employees leads to the formation of digital or virtual teams. Digital interactions enable these teams to work together regardless of time and location. Against this background, the following sections are dedicated to the important aspects of digital transformation and digital organization. Section 13.1 begins by explaining the digital transformation as the overarching driving force that shapes society and organizations. Afterward Section 13.2 deals with the specifications of digital leadership, before Section 13.3 describes the relatively new phenomenon of digital organizations. Finally, Section 13.4 refers to digital teams and the impact of digital technologies on human collaboration.

13.1

Digital Transformation

The digital transformation is of central importance to companies and offers tremendous potential for almost all industries. It opens up new markets and business models and enables agile management as well as the improvement and development of products and services. At the same time, the digital transformation constitutes a dynamic and complex challenge that affects organizational structures and activities of companies.

Definitions of Digital Transformation Despite a considerable number of different definitions of the term “digital transformation” in the literature, a uniform understanding is still missing. Table 13.1 shows various definitions of digital transformation. In order to derive a systematic definition of the term digital transformation, it is necessary to evaluate the definitions through a subject-related, functional, and teleological lens and to identify commonalities at the respective level. When comparing the various definitions in terms of their subject-related aspects, the convergence of some central characteristics is apparent. Many definitions consider the application of technology or a technology-induced change as central aspects. Regarding this, the universally and ubiquitously applicable character of technology across all economic and social areas is emphasized. In addition, the definitions inherently imply an adaptation to the novel conditions of the digital economy. From a functional perspective, the present definitions underline the profound impact of technology on economy and society. In this context, some definitional approaches also take into account the way technology works at the organizational level and address the changes of business models, customer relationships and value propositions, as well as the development of new business models, processes, software applications, and systems. As far as teleological aspects are concerned, the definitions are somewhat heterogeneous. While most approaches ignore teleological aspects or address them

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Table 13.1 Selected definitions of digital transformation Author(s) Capgemini Consulting (2011)

Bouée and Schaible (2015)

Berghaus and Back (2016)

Schwertner (2017)

Kofler (2018)

Definition Digital transformation (DT)—the use of technology to radically improve performance or reach of enterprises—is becoming a hot topic for companies across the globe. Executives in all industries are using digital advances such as analytics, mobility, social media, and smart embedded devices—and improving their use of traditional technologies such as ERP—to change customer relationships, internal processes, and value propositions. We understand digital transformation as the consistent interconnectedness of all industrial sectors and the adaptation of the actors to the new conditions of the digital economy. Decisions in interconnected systems include the data exchange and analysis, the calculation and evaluation of options, as well as the initiation of actions and consequences. Digital transformation is a technology-induced change on many levels in the organization that includes both the exploitation of digital technologies to improve existing processes and the exploration of digital innovation, which can potentially transform the business model. Digital Business Transformation is the application of technology to build new business models, processes, software, and systems that results in more profitable revenue, greater competitive advantage, and higher efficiency. Businesses achieve this by transforming processes and business models, empowering workforce efficiency and innovation, and personalizing customer/citizen experiences. From a societal perspective, the digital transformation is omnipresent and affects every individual—it is irrevocable. We are all affected and actively drive this continuous change in different roles (for instance, as customers, developers, employees, scientists) without any foreseeable end.

Source: Wirtz (2020b)

superficially in the sense of improving the performance or reach of companies, others name specific objectives and purposes such as an increase in sales, competitive advantages, efficiency gains, innovation, as well as personalization of the customer experience. From this overview, the different perspectives and commonalities in terms of content and scope become apparent. Moreover, many of the definitional approaches show a specialized and narrow understanding of the term. All things considered, none of the definitional approaches addresses the subject-related, functional, and teleological aspects comprehensively. For the purpose of this book, a broad, integrated definition of digital transformation is applied. Definition of Digital Transformation (Wirtz 2020b) The digital transformation represents the fundamental change and transformation of economy and society toward a digital-based economic and social (continued)

13.1

Digital Transformation

475

system. In this process, all economic and social structures and processes are significantly supported and shaped by digital technologies with the aim of improving efficiency and effectiveness at a higher level of welfare.

Phases of Digital Development and Transformation In order to develop a basic understanding of the digital transformation and its effects on companies, this section provides an analysis of the general digital development process, classifying digital transformation within it. Figure 13.2 depicts the phases of

• Beginning of digital development

• Successive digital adaptation • Comparatively moderate environmental changes/dynamics • …

• Digital extension of the current system Moderate System Change

Digital Extension and Migration

• Digital development of new business models such as new distribution channels (online)

Digital-Incremental Evolution

Stable System

Digital Evolution and Adaption

• Central control through intensive digitization

• …

Digital Transformation

• New digital interaction paths and customer interfaces for business models • Digital technologies integrated in almost all system applications and business activities • …

Fundamental System Change

Radical Digital Transformation

• Complete digital upheaval of the previous system • Digital value constellation • Full digital automation • …

Fig. 13.2 Phases of digital development and transformation. Source: Wirtz (2020b)

Digital Transformation

Significant System Change

• Modifications of the existing value constellations through digitization

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digital development and describes the essential features and implications of the digital transformation for companies. The digital development process can be divided into four successive phases: digital evolution and adaptation, digital extension and migration, digital transformation, as well as radical digital transformation. The starting point of the digital development process is a stable system that initiates the phase of digital evolution and adaptation. The digital evolution and adaptation is characterized by a beginning digital development and a successive digital adaptation accompanied by comparatively moderate environmental changes and dynamics. As the technological progress and the degree of automation are very low, modern information and communication technologies play a subordinate role in this context. The control and governance of technologies is entirely incumbent upon humans. In the subsequent phase of digital extension and migration, a digital extension of the current system is carried out. The activities of companies are supported by a wide range of modern information and communication technologies. In addition, novel business model characteristics, such as new online distribution channels, are developed. In some cases, the support provided by the technology is already partially automated, i.e., the technology takes over central functions for the company, while humans merely monitor the technology deployment and manage other functions. The technological progress is moderate, and the technology-supported optimization potential for corporate decision-making and other business activities is rather limited. Overall, intensive digitization leads to moderate system changes and requires centralized control within the company. While these first two phases of the digital development process can be described as digital-incremental evolution, the next two phases directly refer to the digital transformation. The third phase of digital transformation is characterized by changes in the existing value creation constellations as well as new digital interaction paths and customer interfaces in business models as a result of increasing digitization. In addition, digital technologies are integrated in almost all system applications and business activities. The decision-making and activities of companies are technology-driven and, to a large extent, highly automated under human control. Thus, the technology can undertake all functions of a specific application. In this regard, human beings and technologies monitor and control each other’s activities. Overall, this phase is characterized by a substantial system change. The final phase of digital development consists of a radical digital transformation that is associated with a fundamental system change. This leads to a complete digital upheaval of the previous system and the establishment of an entirely digital value constellation. Moreover, this phase is characterized by fully optimized, technology- and machine-controlled knowledge acquisition, evaluation, decision-making, and governance. Machines and their underlying technologies are fully automated without the need of human supervision. Thus, the machines can manage all functions in all situations without relying on human beings.

13.2

Digital Leadership

477

In particular, between the third phase of digital transformation and the fourth phase of radical digital transformation, there occur substantial upheavals of organizational structures and systems, as the digital transformation dissolves the analog structures and processes of traditional companies. These technological changes call for a new type of leadership that corresponds not only to digital technologies but also to the potentials associated with these technological advancements. This new form of leadership is also known as digital leadership and is described in the following section.

13.2

Digital Leadership

The increasing digitization and the associated digital transformation of economy and society pose a variety of new complex demands on the management of companies. In order to successfully manage the digital transformation and to navigate companies in accordance with their goals, managers and leaders require specific skills and competencies. On the one hand, these competencies and abilities comprise technical and technological skills to understand and apply digital technologies. On the other hand, the digital transformation particularly requires a strategic digital management mindset in order to recognize and successfully address potentials and challenges associated with digital technologies, as well as to adapt the design of corporate structures and human resources management accordingly.

Definitions of Digital Leadership Against this background, the approach of digital leadership is becoming increasingly important in research and management practice. Yet, there is no generally accepted definition of the term “digital leadership” in the literature. The numerous previous definitional approaches are characterized by a heterogeneous understanding of the term. This is illustrated by the exemplary outline of definitions in Table 13.2. Similar to the digital transformation, the derivation of a systematic definition of the term digital leadership requires a differentiation of the listed definitional approaches according to subject-related, functional, and teleological aspects, as well as the identification of content-related commonalities on the respective level. On a subject-related level, the definitional approaches agree that digital leadership characterizes a certain form of leadership. However, the further subject-related description by the different definitions is quite heterogeneous and generic. In this regard, digital leadership is described as a contemporary, holistic, decentralized, or reciprocal form of leadership. Regarding the functional aspects, the integrative effect of digital leadership is emphasized, both in terms of digital challenges and with respect to the employees of the respective company. A special emphasis is given to the ability to connect and involve employees in a participatory way.

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Table 13.2 Definitions of digital leadership Author(s) Buhse (2012)

El Sawy et al. (2016) Petry (2018) Hensellek (2019) Doyé (2018)

Definition Digital Leadership as a form of management that not only masters the old management basics but is also able to abstract old leadership concepts and recipes for success, compare them with the new values and success models from the digital world, and then use them (two-handed leadership). In addition to their traditional role, digital leaders are also required to act as moderators, bridge builders, and organizers of networks. We define digital leadership as doing the right things for the strategic success of digitalization for the enterprise and its business ecosystem. The five characteristics of network, openness, participation, agility plus trust form the so called NOPA+ model of digital leadership. Digital leadership is a reciprocal concept that is not only tied to top management positions in the sense of a top-down approach but also refers to the active involvement of employees at lower hierarchical levels. Digital leadership means using the collective intelligence of employees and peers (swarm intelligence) with decentralized leadership.

Source: Wirtz (2020b)

Moreover, teleological aspects are barely considered among the various definitional approaches. The only objectives, purposes, and intentions mentioned in the definitions refer to the strategic digitization success of companies and the exploitation of the collective intelligence of the employees. In terms of content and scope, the overview illustrates the different emphases and commonalities of the explanations. It is evident that many of the definitions are specific in nature and none of the definitional approaches comprehensively integrates the subject-related, functional, and teleological aspects. In order to overcome the deficit of this narrow and incomplete understanding, a comprehensive, integrated definition of digital leadership is suggested based on existing definitions. Definition of Digital Leadership (Wirtz 2020b) Digital leadership characterizes the leadership of organizational systems and actors based on the comprehensive application of digital technologies. Specific features of digital leadership are high agility, networking, participation, flexibility, and responsiveness to external environmental and internal organizational changes. The objective of digital leadership is to achieve greater effectiveness and efficiency in business activities.

Traditional Leadership Versus Digital Leadership Based on this definition, the following section distinguishes digital leadership from traditional forms of leadership and describes its core aspects and competencies. In this way, a fundamental understanding of digital leadership and its implications for companies can be conveyed. Figure 13.3 compares traditional leadership with the innovative concept of digital leadership.

13.2

Digital Leadership

479

Traditional Leadership

Digital Leadership

• Conventional leadership style

• Agile and flexible leadership style

• No affinity for digital technologies

• Strong affinity towards digital technologies

• Analog mindset

• Digital competencies

• Distant use of digital technologies

• Openness to technology

• Formal vertical communication with employees

• High participation and integration of digital employee skills

• Leadership and management in the sense of instruction and supervision

• Leaders set visions for the use of digital technologies within organizations

• Reactive decision-making

• Creation of a digital culture

• …

• Digital communication of meaning • Open and informal self-organized teams • …

Fig. 13.3 Traditional leadership vs. digital leadership. Source: Wirtz (2020b)

In traditional leadership, digital technologies play no or only a secondary role. Accordingly, traditional leadership is characterized by a distant use of digital technologies and a largely analog mindset. Digital leadership, in contrast, involves not only a high affinity for digital technologies and a fundamental openness to technology but also comprehensive digital skills and competencies. In this respect, technological and engineering skills are of central importance to understand digital technologies and employ them for the effective pursuit of the company’s objectives. Moreover, digital-specific strategic management skills play a vital role to identify, evaluate, and exploit the potentials and challenges of digitization and adapt organizational structures and processes as well as leadership structures accordingly. In addition to this focus on digital technologies, digital leadership also differs from traditional leadership in terms of organizational style and culture. While traditional leadership is characterized by a conventional leadership style, digital leadership emphasizes an agile and flexible leadership approach. Agility and flexibility are essential qualities to keep up with the dynamic development of digitization and its demands on companies. On the interaction level, these two characteristics become apparent by the formation of open and informally selforganized teams. In contrast to traditional leadership, which is characterized by formal vertical communication with employees and perceives leadership in terms of guidance and supervision, digital leadership is based on a visionary, participative, and integrative leadership approach. Accordingly, managers convey visions for the use of digital technologies within the organization and advocate a high level of participation and integration of digital employee skills. While the authoritarian traditional leadership approach advocates a reactive culture within the company, digital leadership aims to establish a digital leadership culture and achieve digital conveyance of meaning. Overall, digital transformation requires and entails digital leadership in companies. This has significant effects on the company and leads to a fundamental digital-based restructuring of the organization. Against this background, the following section presents the central aspects of digital organizations.

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Digital Transformation and Digital Organization

Digital Organization

The substantial dynamics of technological developments and digital transformation require not only a new digital form of leadership but also a redesign of organizational structures and processes. Organizations must be more dynamic and adaptable in order to address the challenges of digitization and successfully exploit its potentials for the achievement of organizational goals.

Definitions of Digital Organization Against this background, the digital organization of companies becomes increasingly important in research and practice. Digital organizations can look back on a long history of development reaching back to the early 1990s, which was initially shaped by the term virtual organization. In the literature, there is still no uniform understanding of digital or virtual organizations. This lack of definitional consistency is illustrated by the heterogeneity of the definitions provided in Table 13.3. Virtual organizations represent the precursor of digital organizations and were— against the background of the early development phase of information and

Table 13.3 Selected definitions of digital/virtual organization Author(s) Wirtz (1995c)

Mertens and Faisst (1996) Picot et al. (1998)

Rouse (2011) Accenture Consulting (2017)

Snow et al. (2017)

Source: Wirtz (2020b)

Definition A virtual organization can be understood as a temporary network of independent companies (suppliers, co-producers, distributors, but also customers or competitors), which is linked via modern information and communication technologies in order to transfer knowledge (knowhow), supplement skills, and share costs to open up new product areas and markets. A virtual company is based on a network of companies that quickly join forces (dynamic configuration and reconfiguration) to take advantage of a competitive opportunity. The virtual enterprise presents itself as a dynamic network. [...] Virtual enterprises are created through the networking of location-distributed organizational units that are involved in a coordinated value-added process based on the division of labor. A digital enterprise is an organization that uses technology as a competitive advantage in its internal and external operations. A digital enterprise is connected and dynamic, flexible enough to embrace continuous change. It uses connected platforms, analytic insights, collaboration, and modular operating models to increase productivity, speed, and responsiveness while putting customers at the center of whatever it does. A fully digital enterprise is a powerful combination of people, technology, and organizing ability that is well suited to today’s economic and social environment.

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communication technologies—primarily focused on inter-company cooperation and organization by means of innovative information and communication technologies. The term virtual organization thus refers in particular to dynamic organizational networks based on the division of labor and partnership-based cooperation processes through new information and communication technologies. In the course of the ongoing digitization and digital transformation, the technological aspect has become increasingly important. As a consequence, the term digital organization was developed and has been increasingly used in research and practice. The overview of definitional approaches illustrates the different emphases and commonalities of the terms with regard to content and scope. In essence, the different approaches of defining digital organization refer to the use of technological networking in companies. Based on these different explanations, an integrative definition of digital organization can be derived. This constitutes the foundation of a comprehensive understanding of digital organizations and serves as a starting point for the further analysis. Definition of Digital Organization (Wirtz 2020b) The digital organization is an organization that is supported by digital information technologies in all essential areas of business activities and digitizes all core business processes. It thus has a digital organizational end-to-end structure (value-added organization from the supplier interface to the customer interface). The digital organization uses digital technologies to achieve a sustainable, technology-based, competitive advantage.

Development Stages of the Digital Organization This definition is closely linked to different development stages of the digital organization. In this regard, four central stages can be distinguished: traditional analog organization, initial digital organization, partially integrated digital organization, and fully integrated digital organization. Thereby, the degree of digital automation and the degree of innovation increase with each development stage. Figure 13.4 shows the development stages of digital organizations. The various development stages of digital organizations differ not only in their degree of digital automation and innovation but also in terms of organizational and technological features. The first stage of development is the traditional analog organization. From an organizational point of view, this form of organization essentially corresponds to a primary organization and is characterized by a strongly hierarchical basic structure with a single-line or multi-line system. The management styles and business models associated with these organizations are largely analog and follow the approach of traditional leadership.

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Degree of Digital Automation

Fully Integrated Digital Organization

Partially Integrated Digital Organization

• Digital network organization

• Cloud/edge computing • Artificial intelligence

• Partially digitized business models

Initially Digitized Organization • Relatively flat hierarchies

Traditional Analog Organization

• …

• Big data

• Broadband Internet • …

• Computer technology • Internet technology • …

• Strong hierarchies • Analog technology • Simple desktop technology

•… Degree of Innovation

Fig. 13.4 Development stages of digital organizations. Source: Wirtz (2020b)

The technological characteristics of the traditional analog organization, such as technical equipment, data, and signal transmission, are also analog in nature. Accordingly, only simple desktop technology and analog devices such as fax and telephone are employed. Thus, the traditional analog organization is characterized by the lowest degree of automation and innovation. The second development stage of digital organization refers to initially digitized organizations. From an organizational point of view, this development stage represents a supplementary-hierarchical or cross-hierarchical secondary organization with a line-and-staff system. Initially digitized organizations have relatively flat hierarchies and focus on aspects such as electronically supported process standardization and organizational stability. They are also characterized by a modified form of management that focuses on the maturity of employees and aims to establish a culture of cooperation within the company including brief and frequent communication cycles. In initially digitized organizations, the management adopts the role of a moderator between analog and digital technologies. Although initial digital organizations break up the analog structures of traditional analog organizations, they only achieve a low digital speed of action, reaction, and interaction. This is particularly evident in its technological features, including the use of electronic data processing, data processing service centers, computers, Internet, and email. The third stage of development refers to the partially integrated digital organization. Characteristic features of this stage are flat organizational structures and flat hierarchies.

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In this context, digital technologies start playing a central role with regard to organizational structures and processes and have a significant impact on management and intra-organizational cooperation. This stage of development is particularly characterized by features such as partially digitized business models, the use of Scrum, digital collaboration, and data-supported decision-making. The focus is primarily on process optimization within the company. In addition, partially integrated digital organizations feature management concepts that are characterized by a proactive organizational culture with decentralized responsibilities. Against this background, the supervisor acts as a digital facilitator and enabler. The collaboration among employees is open, informal, and self-organized. Overall, companies with a partially integrated digital organization possess moderate digital action, reaction, and interaction capabilities. From a technological perspective, these organizations are characterized by the application of big data, predictive analytics, in-memory-computing, broadband Internet, videotelephony, etc. The fourth and final development stage is the fully integrated digital organization. In this stage, there is a comprehensive integration of digital technologies across all areas of the organization. The organization becomes a digital network organization characterized by a digital management mindset, a digital organizational culture, and a digital business model. The primary focus of fully integrated digital organizations lies on digital process automation within companies. In this context, organizational characteristics such as big data-based business activities and processes, digital value chains, and a digitalbased user orientation are of particular importance. The management of fully integrated digital organizations primarily follows the principles of digital flexibility and agility and promotes digital collaboration in autonomous digital teams in the sense of self-learning entities. Accordingly, digital action, reaction, and interaction capabilities in fully integrated digital organizations are highly developed. Technically speaking, the most advanced and highly developed digital technologies are applied at this development stage. This particularly includes cloud/edge computing, machine learning, Internet of Things, blockchain technology, artificial intelligence, and robotics. Thus, fully integrated digital organization also exhibits the highest degree of digital automation and innovation of all development stages of the digital organization. Figure 13.5 summarizes the essential organizational and technological characteristics of the different development stages. The development and design and the success of the digital organizations largely depend on the use of digital technologies, instruments and methods by the company.

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Traditional Analog Organization • Primary organization

Initially Digitized Organization

• Strong hierarchy

• Secondary organization that completes/ transcends hierarchies

• Analog mindset

• Rod line system

• Analog business model

• Focus on process standardization

• Single-line or multiline system

• Central responsibility • Process orientation

Organizational Characteristics

Digital Transformation and Digital Organization

• Low integration or participation of users/customers • Concentration of specialists • Silo thinking • Formal vertical communication • Superior as sole directional control • Leadership and management in the sense of instruction and supervision • Reactive culture • …

• Development culture • Establishment of intensive feedback loops • Relatively flat hierarchies • Focus on organizational stability • Low digital action, reaction and interaction capability

Partially Integrated Digital Organization • Flat organizational structure

• Digital network organization

• Flat hierarchies

• Digital mindset/digital organizational culture

• Partially digitized business model • Digital integration and participation of users/customers • Focus on process optimization • Data based decision making • Moderate digital action, reaction and interaction ability • Electronic/digital collaboration

• Responsible employees

• Decentralized responsibility

• Short and frequent communication cycles

• Supervisor as digital conveyor and enabler

• Culture of cooperation

• Proactive organizational culture

• Manager as moderator between analogue and digital technologies • …

Fully Integrated Digital Organization

• Open informal and self-organized teams • …

• Digital business model/digital twin • Big data-based business activities and processes • Digital value chains • Digital interfaces • Digital cross-functional connections • High digital action, reaction and interaction capability • Digital transparency • Digitally based user/customer orientation • Focus on digital process automation • Digital collaboration • Use of agile methods

• Digital flexibility and agility • Self-learning organization • Autonomous digital teams • …

• Electronic data processing

• Big data

• Cloud/edge computing

• Predictive analytics

• Machine learning

• Analog signal transmission

• Data centers

• Internet of things

• Simple desktop technology

• Internet • Email

• Computer-computer connection/cross communication (peerto-peer-architecture)

• Fax

• Floppy disks

• In-memory-computing

• Telephone

• CDs

• Artificial intelligence/ augmented intelligence

• Printer

• …

• Electronic collaboration Tools (Cisco Webex)

• Analog data

Technological Characteristics

• Analog technology

• …

• Computer

• Videotelephony

• Broadband Internet • …

• Blockchain technology • Virtual, augmented and mixed reality

• Hyper automation • Robotics • Neuromorphic hardware • Brain-computer interfaces • …

Fig. 13.5 Organizational and technological characteristics of the different development stages of digital organizations. Source: Wirtz (2020b)

In this context, companies have a multitude of technological options at hand. Table 13.4 provides an overview of central digital technologies, instruments, and methods in digital organizations (content adapted from McKinsey & Company 2018).

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Table 13.4 Digital technologies, instruments, and methods in digital organizations Digital Technologies, Instruments, and Methods Conventional Web Technologies

Cloud-Based Services

Mobile Internet Technologies

Big Data and Big Data Architecture

Internet of Things

Design Thinking

AI Applications

Robotics

Description • Active use of websites or online applications • Provision of websites and online applications • HTML • JavaScript • ... • Use of external storage capacities • Use of external computing power • Use of external software • Flexible and location-independent access to data, software, and computing power • ... • Location-independent access to nearly all contents of the Internet • High data transfer rates through 5G technology (10 gigabits per second) • ... • Effective and efficient analysis and processing of large, complex, and partly unstructured datasets • Data-based decision-making • ... • Inter-connectedness of different physical and virtual objects via the Internet • The objects can communicate and interact autonomously via the Internet • ... • Method for solving complex problems • Application of creative techniques and technological tools • ...

Percentage of Use in Successful Digital Organizations

• Automation of intelligence • Based on a variety of inputs, the system learns to find the expected solutions to problems • For example, in the form of language translation • ... • Use of information technology, mechanical elements, and electrical engineering to create a physical connection between a technical unit and the real environment • Interaction between electronics and mechanics • ... (continued)

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Table 13.4 (continued) Digital Technologies, Instruments, and Methods

Advanced Neural Machine Learning (Deep Learning)

Augmented Reality

Additive Manufacturing (3D Printing)

Description • Artificial neural networks as information-technological replication of the human brain • Machine learning is the artificial generation of knowledge by machines • Subfield of artificial intelligence • ... • Virtual extension of human perception • Fictional extension of the environment through digital information and symbols • ...

Percentage of Use in Successful Digital Organizations

• Computer-controlled successive generation of three-dimensional products • For example, 3D printing • ...

Data source: McKinsey and Company (2018)

The most important technologies listed in this table are conventional web technologies, cloud-based services, mobile Internet technologies, as well as big data and big data architecture. Conventional web technologies refer to the active use or provision of websites and online applications based on the HTML markup language and the scripting language JavaScript, for instance. Conventional web technologies are used by about 85% of successful digital organizations and are thus the most widespread form of technology in the context of digital organizations. With a slightly lower usage rate of 81%, cloud-based services are also frequently deployed in successful digital organizations. Cloud-based services refer to the use of external storage capacity, computing power, and software. They allow companies flexible and location-independent access to data, software, and computing power. Another increasingly important technology is the mobile Internet, which is employed by about two thirds (68%) of successful digital organizations. Mobile Internet technologies offer location-independent access to almost all content and services on the Internet. In this context, the 5G technology represents the latest standard in mobile Internet, which is characterized by high data rates of 10 gigabits per second. In addition, big data or a big data architecture is one of the most important digital technologies in the context of digital organization. Big data and big data architectures are used by more than half (56%) of successful digital organizations. They enable the effective and efficient analysis and processing of large, complex, and sometimes unstructured volumes of data. This enables companies to make databased decisions. In summary, conventional web technologies, cloud-based services, mobile internet technologies, and big data and big data architecture are the most widespread

13.4

Digital Teams

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digital technologies in the context of digital organizations as they are already deployed by most of them. In addition, there are a number of other significant digital technologies, instruments, and methods whose potentials for digital organization are largely untapped as they are characterized by very low to moderate adoption rates so far. Besides the Internet of Things (45%), design thinking (44%), and AI applications (31%), this includes robotics (21%), advanced neural machine learning (deep learning) (17%), augmented reality (15%), and additive manufacturing (3D printing) (13%). In particular, the latter technologies have the potential to significantly influence and shape the further development of digital organizations. The digital-based alterations on the management and organizational level in the course of the digital transformation have a substantial effect on the interaction level and especially on the design of interpersonal collaborations within companies. This modified or rather new form of digital-based collaboration primarily happens within digital teams, which are described in the following section.

13.4

Digital Teams

In order to address the complex demands associated with the dynamic development of the digital transformation, companies must implement adjustments on the interaction and cooperation level. The main guiding principles for collaboration are agility and flexibility in a digitized working environment. They are an integral part of digital leadership and are transferred top-down from the management level to the interaction level through adjusted organizational forms. However, increasing digitization not only demands adjustments but also enables new forms of cooperation and working models. Against this background, digital teams are becoming increasingly important in digital organizations. Similar to the digital organization, digital teams also look back on a longer history of development, which already began in the early 1990s and was initially dominated by the term virtual teams.

Definitions of Digital Teams The literature still lacks a comprehensive understanding of the concept of digital or virtual teams. This is illustrated by the exemplary definitions in Table 13.5. As a preliminary concept of digital teams, virtual teams have emerged in the course of the early development phase of information and communication technologies and the increasing diffusion of computer-based work processes. The focus primarily lies on the collaboration among several employees irrespective of location and time by means of conventional information and communication technologies, such as email, fax, and telephone. Thus, the term virtual teams in

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Table 13.5 Selected definitions of digital/virtual teams Author(s) Jarvenpaa and Leidner (1999) Zaccaro and Bader (2003)

Hertel et al. (2004)

Malhotra et al. (2007)

Hewitt (2013)

Definition A virtual team is an evolutionary form of a network organization (Miles and Snow 1986) enabled by advances in information and communication technology. The “virtual” team is another phrase that has recently entered prominently into our leadership lexicon. The term “virtual” is misleading because it suggests a degree of unreality, as if such teams exist only in the nether world of electrons. These are real teams having all of the characteristics, demands, and challenges of more traditional organizational teams. The differences reside in two key features. First, members of these new forms of organizational teams either work in geographically separated work places, or they may work in the same space but at different times. Still other teams have members working in different spaces and time zones, as is the case with many multinational teams. The second feature is that most, if not all, of the interactions among team members occur through electronic communication channels. [. . .] virtual teams consist of two or more persons who collaborate to achieve common goals, while (at least) some of the team members work at different locations (or times) so that communication and coordination is predominantly based on electronic communication media (email, fax, phone, video conference, etc.). Virtual teams are teams whose members are geographically distributed, requiring them to work together through electronic means with minimal face-to-face interaction. Digital teams are responsible for developing, testing, and implementing a strategy to reach and engage target audiences through digital channels like web, mobile, and social.

Source: Wirtz (2020b)

particular refers to a dynamic and decentralized information and interaction network characterized by the use of information and communication technologies. Due to the ongoing digitization and the development of digital-based innovative agile working methods (e.g., Scrum) and digital collaboration platforms (e.g., Microsoft Teams) during the last decade, the term digital teams has emerged. The concept of digital teams refers to the importance and ubiquity of highly developed digital information and communication technologies in business cooperation and the corresponding opportunities with regard to networking, speed of action, agility, and flexibility. Against this background, an integrative definition of digital teams can be derived that contributes to a comprehensive understanding of the term and serves as a starting point for the further analysis. Definition of Digital Teams (Wirtz 2020b) A digital team is a working group of employees supported by digital information technologies in all essential areas of work and business activity, and in (continued)

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Digital Teams

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which all essential business work processes are digitized. At the core of the digital team are digital working environments and platforms that enable agile and flexible collaboration regardless of time, location, or people. Employees can work together interactively, simultaneously, and in real time to complete tasks by means of digital technologies. Digital teams aim at achieving sustainable technology-based efficiency and effectiveness at the work level.

Development Stages of Digital Teams This definition is based on the different development stages of digital teams. There are three main stages of development including traditional teams, partially digital teams and digital teams. Analogous to the development stages of the digital organization, the degree of digital automation and the degree of innovation also increases with each development stage. Figure 13.6 shows the development stages of digital teams.

Degree of Digital Automation

Digital Teams • Collaboration regardless of time and location

Partially Digital Teams

Traditional Teams • Employees collaborate in location-based offices

• Joint digital working platform

• Spatial separation

• Use of Scrum/Teams

• Self-directed and selfregulated teams

• Joint virtual reality room

•…

• Partial use of digital technologies

•…

• Separate teams • Analog technologies •…

Degree of Innovation

Fig. 13.6 Development stages of digital teams. Source: Wirtz (2020b)

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The first development stage refers to traditional teams, characterized by the lowest degree of automation and innovation. Several employees work together in location-based offices in separate teams. Traditional teams represent a concentration of specialists whose work is typically characterized by silo thinking. The collaboration in digital teams mainly relies on analog technologies, such as telephone and fax machines or simple desktop technology. The technological, organizational, and managerial background of this development stage corresponds to the first development stage of digital organization, i.e., traditional analog organization. Partially digital teams represent the second development stage of digital teams and come quite close to the initial understanding of virtual teams. The technological and organizational and managerial background of partially digital teams reflects the development stage of the partially integrated digital organization. Partial digital teams are open informal groups that organize and control themselves. They consist of several employees who can act and work spatially separated from each other. In this context, they make partial use of digital information and communication technologies such as broadband Internet, email, videotelephony, and computer-computer connection (peer-to-peer architecture). Thus, partially digital teams form a dynamic decentralized digital collaboration network of employees who can work together regardless of location and time. They have a moderate digital action, reaction, and interaction ability. Finally, the last stage of development is represented by the digital teams, which exhibit the highest degree of digital automation and innovation of all stages. The technological, organizational, and managerial background of this development stage corresponds to the last development stage of digital organizations, i.e., the fully integrated digital organization. Digital teams work autonomously and are self-controlled. Collaboration in key areas, activities, and processes is supported by highly developed digital information and communication technologies such as blockchain technology, AI technologies, as well as virtual and augmented reality technologies. Thus, all collaborative activities of digital teams take place in a digital working environment. At the center of this digital work environment are digital work and collaboration platforms such as Microsoft Teams. These are often referred to as digital workplaces. Such cooperation platforms include useful functions and services for information (e.g., wikis, push notification function), communication (e.g., messenger and email programs), and coordination (e.g., calendar function, process, and resource planning tools). By using these digital collaboration platforms, digital teams can work on complex projects and tasks regardless of time, location, and people. The members of digital teams can work and complete tasks interactively, simultaneously, and in real time. Thus, digital teams have a high digital action, reaction, and interaction capability. Moreover, the degree of digital transparency, digital networking, and digital collaboration is particularly high in digital teams. In addition to digital collaboration, digital teams can be distinguished by the use of agile working methods such as Scrum or Kanban. These methods are

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Summary

491

characterized by an iterative work process and enable flexible adaptations as well as continuous process improvements even during the project. Here, digital teams can make use of a variety of different agile techniques. These include, for instance, planning or scrum poker, which is a dynamic agile technique for estimating workload. Apart from that, task or story boards that summarize current activities and tasks in an overview as well as burn-down charts that visualize project status and work status serve as agile techniques. Communication within digital teams is very efficiency-oriented and often characterized by short interactions or conversations. It is largely informal and typically takes place through short daily status meetings (so-called daily stand-up or scrum meetings). The combination of agile working methods and digital information and communication technologies gives digital teams a high degree of digital flexibility and agility, enabling them to address the complex and constantly changing demands of digital business. Against this background, the main goal of digital teams at the working level is to generate sustainable technology-based efficiency and effectiveness gains for companies. Overall, digital teams together with digital leadership and digital transformation form the essential aspects of the digital organization, which in their entirety constitute a central driver of digital business.

13.5

Summary

• Digital transformation can be defined as the fundamental change and transformation of economy and society toward a digital-based economic and social system. In this process, all economic and social structures and processes are significantly supported and shaped by digital technologies with the aim of improving efficiency and effectiveness at a higher level of welfare. • The phases of digital development and transformation are digital evolution and adaption, digital extension and migration, digital transformation, as well as radical digital transformation. • Digital leadership can be defined as the leadership of organizational systems and actors based on the comprehensive application of digital technologies. Specific features of digital leadership are high agility, networking, participation, flexibility, and responsiveness to external environmental and internal organizational changes. The objective of digital leadership is to achieve greater effectiveness and efficiency in business activities. • Compared to traditional leadership, digital leadership is characterized by a more agile and flexible leadership style, a strong affinity to digital technologies, digital skills, openness to technology, and a digital culture lived by leaders. • The digital organizations can be defined as an organization that is supported by digital information technologies in all essential areas of business activities and digitizes all core business processes. It thus has a digital organizational end-toend structure (value-added organization from the supplier interface to the

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customer interface). The digital organization uses digital technologies to achieve a sustainable, technology-based competitive advantage. • Digital organizations can be divided into traditional analog, initially digitized, partially integrated, and fully integrated digital organizations. These different forms of digital organizations are distinguished by the degree of innovation and the degree of digital automation. • A digital team can be defined as a working group of employees supported by digital information technologies in all essential areas of work and business activity and in which all essential business work processes are digitized. At the core of the digital team are digital working environments and platforms that enable agile and flexible collaboration regardless of time, location, or people. Employees can work together interactively, simultaneously, and in real time to complete tasks by means of digital technologies. Digital teams aim at achieving sustainable technology-based efficiency and effectiveness at the work level. • Digital teams can be divided into traditional, partially digital teams, and digital teams. These different forms of digital teams are distinguished by the degree of innovation and the degree of digital automation.

13.5

Summary

Chapter 13 Questions and topics for discussion

Review questions

1. Describe the digital transformation pyramid. 2. Describe the phases of digital development and transformation. 3. Distinguish digital leadership from traditional leadership. 4. Describe the development stages of digital organizations and name the technological and organizational characteristics of each stage.

5. Define digital teams and describe their essential aspects.

Topics for classroom discussion and team debates 1. Discuss the socio-economic effects of digital transformation for your city. 2. Discuss the advantages and disadvantages of digital leadership in an open and democratic society against the background of traditional leadership. 3. Debate: Will the development towards digital organizations fundamentally change our understanding with regard to social systems and structures? Will digital development lead to the dissolution of traditional forms of organization?

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Digital Marketing and Electronic Commerce

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Contents 14.1

14.2

14.3

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Digital Marketing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Aspects of Digital Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer Model of Determinants of Customer Value . . . . . . . . . . . . . . . . . . . . . . . . . . Market Segmentation Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Design of the Digital Marketing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Marketing Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price Differentiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-linear Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price Bundling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dynamic Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Products/Digital Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Product Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Product Variation and Product Differentiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Product Elimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communication via Digital Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communication Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Targeting in Digital Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Communication Instrument Influencer Marketing . . . . . . . . . . . . . . . . . . . . . . Further Instruments of Digital Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Branding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brand Management Strategies in Digital Branding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Online/Offline Multichannel Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service-Channel Diversification Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business Multichannel Strategy Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . Design Multichannel Strategy and System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CRM in Digital Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Digital Customer Relationship Management . . . . . . . . . . . . . . . . . . . . . Customer Loyalty Dimensions in Digital CRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_14

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Customer Relationship Process in Digital CRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Instruments of Digital CRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Learning Objectives By working through this chapter, you will be able to: 1. Understand the role of digital marketing and the development of a digital marketing strategy in the context of digital business. 2. Define and describe components of the digital marketing mix. 3. Know how to classify targeting within digital marketing and understand the importance and reach of influencer marketing in the context of digital business. 4. Describe and discuss the stages of the strategic multichannel management process. 5. Know the essential phases of the digital business customer relationship management process, including various digital CRM instruments.

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Digital business has influenced traditional marketing in many ways. On the one hand, modern communication technologies, especially the Internet, have brought completely new distribution channels, product types, and means of communication into the marketing mix. On the other hand, marketing has also changed in some areas due to the use of ICT. In this context, it is particularly important to mention the numerous possibilities to support traditional marketing activities efficiently and effectively by means of digital business. Digital business plays an important role for a company’s marketing strategy and in all areas of the marketing mix. Therefore, Section 14.1 describes the basic process of digital marketing strategy development, addressing important aspects with regard to goal planning and strategy design in digital marketing. Section 14.2 outlines key aspects of the digital marketing mix, addressing distribution management, product and service management, price management, communication management, and customer relationship management in the context of digital business. Subsequently, Section 14.3 presents key aspects of online/offline multichannel marketing. Finally, Section 14.4 addresses CRM in the context of digital marketing.1

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Digital Marketing Strategy

Along with innovations in the area of information and communication technologies, digital marketing has gained significant importance in the context of marketing and digital business. This section describes the process of digital marketing strategy development, which particularly includes all corporate activities that focus on the planning and definition of the digital marketing strategy. This development process takes place against the background of the defined vision, mission, and goals of digital marketing, as well as the specific situation of a company.

Core Aspects of Digital Marketing The realization of a digital marketing strategy rests upon strategic initiatives within companies and impulses that govern the evolution of the business. Figure 14.1 shows the general systematics and core aspects of digital marketing strategy development. The following describes the basic steps and aspects of digital marketing strategy development in more detail.

1

See for the following chapter also Wirtz (2020b).

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Planning of Digital Marketing Goals

• Frame of reference and dimensions of digital marketing goals • Formal digital marketing goal system based on customer value • Situation analysis of external and internal environment

Design of Digital Marketing Strategy

• Deduction of strategic options • Assessment of strategic options • Selection and definition of the digital marketing strategy •…

• Market segmentation for determining target groups • Methods for assessing customers •…

Fig. 14.1 Core aspects of digital marketing strategy development. Source: Wirtz (2008, 2013c)

The process of digital marketing strategy development, in simplified terms, includes the goal planning of digital marketing and the subsequent formulation of a digital marketing strategy. From a management perspective, planning refers to the regulative and creative thinking ahead for future business processes within the company (Reynolds 2010). The central characteristic of planning is a holistic and networked thinking that involves and coordinates all subareas of planning. Planning in terms of thinking about what should be achieved and how best to achieve it forms the logical basis of management processes in general (Chaffey et al. 2019). Based on these deliberations, the goal planning of digital marketing thus represents the first major stage of digital marketing strategy development. In this connection, the first important aspect constitutes a frame of reference and the dimensions of digital marketing goals. A careful formulation of the digital marketing goals as target states that can be achieved by means of digital marketing tools is important for two reasons. On the one hand, goals provide an orientation and channeling of planning and activities, and on the other hand, goals serve as benchmarks against which activities and outcomes are measured. Companies usually pursue a variety of different goals at the same time, which normally have a complementary, concurrent, and hierarchical relationship to each other (Chaffey et al. 2019). Therefore it is necessary to integrate these objectives into a system of order that takes into account the different relationships and sets priorities in case of conflicting goals. Considering hierarchical relationships, it is common to classify the goals according to their maturity (long-term/strategic versus short-term/operative goals) and the organizational corporate structure (e.g., higher-level corporate goals and

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business unit goals for procurement, production, or sales) (Grant 2016). In this connection, digital marketing goals need to be consistently embedded within these hierarchical goal systems. In general, this means that companies have to deduce suitable marketing goals from their corporate goals. At the marketing level, it is then again necessary to decide which of the marketing goals are supposed to be realized via traditional marketing measures and which via digital marketing measures. In addition to pursuing purely transactional goals, digital marketing has special advantages with regard to marketing goals referring to customer loyalty and customer relationships. Thus, it is reasonable to place customer loyalty, customer relationships, and the associated customer value at the center of the digital marketing goal system. This results in a formal goal system based on customer value, which has to be designed in line with the phases of the customer relationship process. The task of digital marketing goals to serve as benchmarks requires an accurate operationalization of the goals. For this purpose, they must be precisely defined with regard to the dimensions of content, level (scope), and time reference (Grant 2016; Chaffey et al. 2019). Against this background, there are four major dimensions of digital marketing goals, including digital customer retention, frequency of digital use, digital usage time, and revenues from customer loyalty. The first dimension, digital customer retention, refers to the goal of permanently binding customers to the company or its brand and products, which is also very important in the traditional marketing context. This dimension forms the basis of all other goals associated with customer retention and thus takes a special position, insofar as companies always observe it either explicitly or implicitly when taking measures with regard to customer retention. The second dimension pertains to the frequency of use of a digital offer within a given time period and is comparable to the repurchase rate in traditional marketing. Here, companies use certain indicators such as page impressions or visits per user. The third dimension refers to the goal of maximizing the usage time of a digital offer and thus keeping users on the website as long as possible. In practice, the term stickiness is often used to describe this circumstance. A corresponding concept in traditional marketing, for instance, is the time spent in a store. The fourth dimension includes gains based on customer loyalty, including sales and revenues based on customer loyalty. These revenues increase with the frequency of use within a certain time, the customer’s attitude toward the website, and the usage time. Based on the above-mentioned dimensions, Fig. 14.2 presents exemplary digital marketing goals that companies may pursue.

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Increase revenues/ advertising revenues from frequency of use and usage time

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Reduce user/customer churn

Make users/customers to customers/patrons and achieve enduring customer loyalty

Reduce customer complaints and customer satisfaction

Increase number of sales transactions and (re-)purchases

Increase digital usage time and stickiness

Exemplary

Provide demanded product/service type

Digital Marketing Goals

Increase gross margin per customer

Collect valuable customer data

…

Increase frequency of digital use, e.g. number of visits/page impressions

Reduce (re-)acquisition cost

Fig. 14.2 Exemplary digital marketing goals. Source: Wirtz (2001a, 2020b)

Following the above-mentioned frame of reference and dimensions of digital marketing goals, another important aspect of goal planning in digital marketing refers to the development of a formal digital marketing goal system based on customer value. Within this goal system of digital marketing that incorporates these exemplary digital marketing goals, the overall customer value can be broken down as an economic measure across psychographic dimensions such as customer loyalty and customer satisfaction to the level of digital marketing tools (product, pricing, distribution, and communication policy). In this connection, the term customer value describes the economically evaluated contribution of individual customers to the success of a company (Chaffey et al. 2019). Companies consider the establishment and maintenance of customer relationships in this context as an investment object and determine the customer value as the present value of the customer relationship (Schneider 2017). The investment for the company only makes sense if the present value is positive. While the customer lifetime value is often used as an equivalent term to customer value, the term customer equity needs to be distinguished from customer value.

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Customer equity is the sum of all individual customer values and corresponds to the value of the entire customer base of the company (Schneider 2017).

Customer Model of Determinants of Customer Value Since digital marketing particularly focuses on the interaction with individual customers, it appears reasonable to put the customer value at the center stage of the digital marketing goal system, since this customer-specific level of analysis supports a target-oriented selection of profitable customers as well as the personalized design of the digital marketing instruments (Schneider 2017). An essential requirement for using the customer value is the collection of customerspecific data, which is difficult to accomplish in the context of traditional mass marketing (Chaffey et al. 2019). Due to the technological opportunities and the interactions already taking place in the context of digital marketing, customer-related data collection is not only necessary but also easily to realize at no major additional cost. This also speaks for using the customer value as a key factor in the digital marketing system. A customer model serves to depict the various determinants of customer value in terms of a modeltheoretic conception (Reynolds 2010). This model intends to provide the frame of reference for the digital marketing goal system and is shown schematically in Fig. 14.3 (content based on Rust et al. 2002; Burmann 2003).

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Customer-related payments-out (cost)

Probability of purchase or repurchase Total value of product for customer

Determinants

Value Equity (functional value)

Instruments

Instrumental Level

Customer-specific purchase frequency

Customer Value

Psychographic Level

Economic Level

Customer Equity Customer-related paymentsin (revenue)

Brand Equity (emotional value)

Relationship Equity (value from customer relationship)

Perceived • Quality

• Brand awareness and attitudes towards brand

• Customer retention

• Price

• Public perception of company

• Empathy

• Convenience

• Customer inclusion

• Reciprocity

• Trust

In particular, direct product, price and distribution policy

In particular, direct communication policy

In particular, direct communiation, price and product policy

For example,

For example,

For example,

• Increase in value through personalization of product

• Image building and branding

• Including customers in product development process

• Individual pricing • Convenient and reliable direct distribution

• Public relations

• Continuous direct communication during customer relationship • Customer retention schemes

Fig. 14.3 Customer model of determinants of customer value. Source: Wirtz (2005, 2016a)

This representation belongs to the group of hybrid models of customer value that explicitly include economic and non-economic variables (Rust et al. 2001). The great advantage of the illustrated hybrid model of customer value is the opportunity of deriving recommendations for action with regard to acquiring new customers, investing in existing customer relationships, and applying marketing instruments (Rust et al. 2001). On a psychographic level, the customer value model presented reflects the total value of the product from the customer’s point of view, including the functional value of the product (value equity), the emotional added value (brand equity), and the value from the customer relationship (relationship equity). From the company’s point of view, these three value components represent investment areas that involve all digital marketing expenses. The total value perceived by the customer determines the probability that the customer will purchase or repurchase the product or service. At the economic level, the customer value ultimately results from this purchase probability together with the customer-specific purchase frequency as well as the

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customer-related payments-in and payments-out (Rust et al. 2001). The three value components are not only connected to the economic customer value; they are also associated with measurable determinants. At this point in the hybrid model of customer value, the settings relevant to the purchase behavior are taken into account, since the determinants of the value components are to be assessed from the customer’s point of view and reflect their perception of the company and its products or services. The following determinants can be assigned to the value components (Lemon et al. 2001). First, the functional value (value equity) depends on the quality and the price of the product or service as well as the potentially additionally offered services. The difference between perceived functional satisfaction of needs and the “sacrifice” to be made for the product or service leads to the net benefit for the customer, which should be positive and greater than those of competing products or services (Lemon et al. 2001). The sacrifice for the customer is composed of the price of the product or service, the time spent, the search costs, etc. The emotional added value (brand equity) is determined by the brand awareness, the attitudes toward the brand, and the public perception of the company. The emotional added value that solely emerges from the brand and not the product serves to increase the attractiveness of the offer. Brand awareness and positive attitudes toward the brand that ideally result in an emotional bond between the customer and the company require that the brand is well known and the company has a positive image in the public (Kumar 2004). Brand awareness affects the probability that the product will be part of the customer’s evoked set, which means that it is among their preselection of all products from the market that they perceive as acceptable and relevant to their purchase decisions (Keller 1993). The value to the customer resulting from the continuing relationship is influenced by the determinants of customer loyalty or engagement (bonding), empathy for the customer, reciprocity of the relationship, and trust. Compared to a single transaction with the company, the customer particularly benefits from the relationship through preferential treatment, knowledge transfer, and monetary incentives within the scope of customer loyalty programs. As already indicated in Fig. 14.3, companies can influence these determinants of the three value components by means of specific measures in the context of product, price, distribution, and communication management. At the level of digital marketing instruments, companies can also connect with the stages of the customer relationship process, since they have to set different priorities in selecting and designing instruments according to the respective stage. Price management is particularly relevant in the stage of order acquisition and customer recovery, product management additionally in the stage of product use, and distribution management in the stage of purchase and fulfillment. Following the above-mentioned development of a digital marketing goal system, the next important aspect of goal planning in digital marketing refers to a marketingspecific situation analysis. This situation analysis examines the company’s internal and external environment, identifying the company’s strengths and weaknesses as well as the opportunities and risks of the environment, in order to obtain a complete overview of the initial situation.

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The marketing-specific situation analysis follows the same structure as the general situation analysis presented in the context of digital business strategy. Therefore, it shall not be further discussed here (for a more detailed description of a situation analysis, see Section 13.3). Yet, it is necessary at this point to highlight the importance of a situation analysis with regard to digital marketing, as it is crucial to understand the specific needs associated with digital marketing and to adjust respective target definitions and planning processes, if necessary. In addition to the marketing-specific situation analysis, market segmentation is another important aspect of goal planning in digital marketing. Market segmentation refers to subdividing an overall market into internally homogeneous subgroups (market segments) that are heterogeneous among themselves with regard to their market impact. The objective of market segmentation is to increase the transparency of the sales market, identifying the consumer groups whose needs can best be satisfied by the services offered by the company. A high quality in the selection of target groups is crucial in order to avoid scattering losses and thus important for a high level of efficiency, especially in direct communication. This is why the target group selection is of great importance in digital marketing.

Market Segmentation Criteria Subdividing the relevant market requires criteria that meaningfully define and describe the segments. For this purpose, the criteria have to fulfill requirements with regard to the relevance of purchase behavior, the measurability and accessibility of the segments identified, as well as the profitability and stability over time. Figure 14.4 provides an

Market Segmentation for Identifying Target Groups in Digital Marketing

Geographic Criteria

Sociodemographic Criteria

Behavioral Criteria

Psychographic Criteria

Macrogeographic criteria • Federal states

• Demographic criteria (gender, age, household size, number of children)

• Price behavior (price awareness)

• Motifs and attitudes

• Media use

• Lifestyle criteria (activities, interests, opinions)

• Regions • Counties

• Cities Microgeographic criteria • Districts • Residential areas

• Socioeconomic criteria (education, occupation, income)

• Choice of purchase location

• Product choice (brand choice, brand loyalty, intensity of use and frequency of purchase)

• Value expectations

• Streets

Fig. 14.4 Potential market segmentation criteria. Source Wirtz (2005, 2020b)

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overview of potential market segmentation criteria, which will be briefly discussed in the following (content based on Freter 2008; Meffert et al. 2019). There are four major dimensions of market segmentation criteria, namely, geographic, sociodemographic, behavioral, and psychographic criteria. Geographic market segmentation consists of macro- and microgeographic criteria. The macrogeographic segmentation includes criteria such as federal states, regions, districts, and cities, carrying the great advantage of easy and very cost-effective data collection. However, the main weakness of this approach is that at best it only allows determining indirect interdependencies between the segmentation of consumers and their purchase behavior. Microgeographic segmentation addresses this weakness by focusing on a more detailed segmentation of the market based on neighborhoods, residential areas, and streets or street sections. Furthermore, sociodemographic market segmentation is based on demographic variables, for instance, gender, age, marital status, or household size, and socioeconomic characteristics, such as occupation, education, and income. The application of demographic and socioeconomic segmentation criteria is only of limited use, for instance, when the company offers gender-, age-, group-, or occupational groupspecific products and services. Behavioral segmentation criteria are used to conclude from past to future purchase behavior, which can be examined with regard to features such as product selection, information and communication behavior, price behavior, and choice of purchase location. The relevance of the purchase behavior and thus the practical significance of these segmentation criteria are comparatively high since they are derived directly from the purchase behavior. In this context, observable features include, for instance, the usage behavior of media, the brand choice and loyalty, the purchase frequency and intensity of use, as well as price awareness. However, the causes behind the observable purchase behavior are not taken into account, which limits the possibility of deriving indications for the concrete treatment of the segments by means of the digital marketing instruments. Another possibility for segmenting the market is to classify consumers according to psychographic characteristics. This approach rests upon the finding that purchase behavior is rather influenced by personal, psychological factors than geographic or sociodemographic characteristics. For instance, when it comes to consumer behavior, the demographic age is less relevant than the psychological age, i.e., how old a person feels. The psychographic factors are unobservable constructs of purchase behavior. Motives and attitudes toward a product, brand, and the company as whole are particularly important because a positive attitude is a prerequisite for the purchase of a product or service. Market segmentations based on attitudes and other psychographic features have the advantage that one can often relate to the design of digital marketing tools. Once a company has performed market segmentation and has identified target groups in digital marketing, it should then determine their significance and value to the company and its success. Here, there is a variety of methods companies can choose for measuring customer value, generally involving heuristic and quasi-analytical measures (content based on Bruhn 2014). Figure 14.5 illustrates these measures.

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Measurement of Customer Value

Heuristic Methods

Monetary • Customer gross margin calculation • Customer-based return on investment (ROI)

• Scoring table • Scoring table with microgeographic data

• Customer gross margin potential • Customer equity test • Customer lifetime value

• Scoring models with RFMR table

• ABC analysis with dynamic • Loyality ladder values • Customer life cycle analysis

Static

Static Dynamic

Non-Monetary • Demographic and economic segmentation • Classification key • Positive cluster • Customer portfolio analysis

Dynamic

Monetary • ABC analysis

Quasi-Analytical Methods

Non-Monetary

Fig. 14.5 Measurement of customer value. Source: Wirtz (2005, 2016a)

Unlike quasi-analytical methods, heuristic methods do not rest on mathematical calculations but rather on plausible rules and assumptions that allow assessing customers and respective segments in a relatively easy and efficient way. In this context, one can further distinguish between monetary methods that consider revenue and cost aspects (static and dynamic ABC analysis, customer lifetime analysis) and non-monetary methods that are limited to qualitative statements with regard to value of a customer relationship (demographic/economic segmentation, classification key, positive cluster, customer portfolio analysis, and loyalty ladder). The following describes these different methods in detail. An ABC analysis divides the customer base in A, B, and C customers by means of the respectively generated revenue. The idea behind such a classification is the so-called 80:20 rule, according to which about 80% of the company’s revenue is generated by only 20% of the customer base, that is, the A customer. The ABC analysis can also be carried out dynamically, including future-related revenue estimates (Scholz-Reiter et al. 2012). Based on the concept of the product life cycle, customer life cycle analysis proposes different stages in the course of the customer relationship in which a customer generates different levels of revenue. There is empirical evidence that the revenues approximately assume a form of an s-shaped curve. Based on the current position of the customer in the customer life cycle, companies can make statements about the future revenue potential of the customer (Petersen et al. 2014). Demographic and economic segmentation seeks to deduce demographic and economic characteristics such as gender, age, occupation, income, or wealth from the purchase behavior of existing and potential customers. By means of these characteristics and this behavior, companies aim to distinguish customers that

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greatly contribute to profit from those that are less attractive for the company in terms of revenue (Petersen et al. 2014). A classification key contains various information about an individual customer in coded form. The features captured in the key may vary depending on the situation. For instance, a code with the structure 48153-20-11 contains the zip code, the importance of a customer in terms of revenue (e.g., 10 for less than 1,000 USD per year, 20 for up to 2000 USD per year), as well as the size of the place of residence (e.g., 10 for places with up to 50,000 inhabitants, 11 for places between 50,000 and 250,000 inhabitants). A positive cluster is a group of promising customers whose characteristic profile determined by means of customer structure analyses can be used as a benchmark to evaluate the potential of new customers. According to this concept, there is a disproportionate chance of success if new customers match the profile of the positive cluster with regard to relevant features (Link and Hildebrand 1997). The customer portfolio analysis usually judges customers by the two dimensions of customer attractiveness and the company’s competitive position. While attractiveness indicates the potential of a customer, the competitive position shows the likelihood of winning customers compared to competing companies. Based on the position of a customer in the customer portfolio, companies can decide whether an investment in the customer relationship is of interest to the company or not (Terho and Halinen 2007). The loyalty ladder method helps to classify existing and potential customers according to their relationship to the company. The loyalty ladder describes the way from a potential customer without knowledge of the company and its offer (first rung of the ladder) to the customer with buying interest and to a regular customer making an initial purchase. In line with the concept of customer loyalty, the importance of the customer increases from one rung to another on the loyalty ladder. Based on this method, companies can particularly derive insights with regard to the appropriate type of customer approach, as well as the content and intensity of the interaction with the customer (Gay et al. 2007). In contrast to the heuristic methods, the quasi-analytical methods rest on the assessment of customers by means of mathematical calculations that enable a quantitative comparison of the customer values and thus theoretically ideal decisions. In this connection, one can also distinguish between monetary (customer gross margin calculation, customer-based return on investment, customer equity test, and customer lifetime value) and non-monetary methods (different scoring approaches). The customer gross margin calculation computes the monetary customer value by means of a source-specific assignment of revenues and costs. In this way, it seeks to determine the contribution of every individual customer to the profit for the period. When determining the gross margin potential, a company forecasts future gross margins in order to complement the customer gross margin calculation from one period. This enables both an assessment of existing customers and potential customers (Pfeifer et al. 2005). Within the framework of this method, a company needs to compare the operating income assigned to a customer with the respective investment costs. Based on a customer-related return on investment (RoI), a

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company can assess how profitable it has invested the capital in the customer relationship (Schneider 2017). The customer equity test seeks to achieve an ideal allocation of budget based on the experiences of a company with regard to the costs and success rates of customer acquisition and retention. The company can determine the customer value by including the average profit margin per transaction (Blattberg and Deighton 1996). The calculation of the customer lifetime value is based on an investment calculation procedure called net present value method that is applied to the customer relationship. The customer value results from the net present value of all future and directly attributable payment surpluses of the customer. This calculation can also be complemented by non-monetary factors, such as repurchase probabilities and reference potentials in order to improve the procedure (Berger and Nasr 1998; Gupta et al. 2006). Scoring models assess customers by means of scoring systems with regard to quantifiable characteristics that are relevant to purchase behavior (e.g., purchase frequency, revenue, and return frequency). The scores of each characteristic are regularly summarized to a customer score by applying weighting factors. The so-called RFMR (recency, frequency, monetary ratio) method is a frequently applied dynamic scoring method in digital marketing that calculates the attractiveness of a customer based on the time since the last purchase (recency), the customer’s purchase frequency in the past (frequency), and the customer-specific revenue per transaction (monetary ratio). One can also take account of investments in the customer relationship, for instance, by deduction of points (Gay et al. 2007). The results of the heuristic and quasi-analytical methods of customer assessment are a crucial aspect when planning digital marketing goals and are an important requirement for the design of a digital marketing strategy. After having presented the goal planning aspects as a first step in the process of digital marketing strategy development, the following presents the second step that addresses the actual design of the digital marketing strategy.

Design of the Digital Marketing Strategy The first step in this process refers to the deduction of strategic options that are available to a company within the context of digital marketing. In this connection, the management needs to decide how it wants to address the market and what kind of competitive and customer-focused strategies it should apply. These decisions directly build on the market segmentation approach of companies because they take into account the number of market segments to be covered, the type of segment handling, and the interdependencies among different digital marketing channels. Defining these strategies lays the foundation for the design process of a multichannel digital marketing system (Wirtz 2013c). The following describes the different digital marketing strategies that the management can use to decide how the company wants to act within the market and toward its competitors and customers. For this purpose, the company can draw on various strategies including market development strategies as well as competitive and customer-focused strategies, which are presented in Fig. 14.6.

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Definition and Types of Market Development Strategies

• Undifferentiated market development strategy • Differentiated market development strategy

Definition of Competitive and Customer-Focused Strategies

• Competitive strategy • Customer-focused strategy

• Concentrated market development strategy

Fig. 14.6 Digital marketing strategies. Source: Wirtz (2008, 2013c)

Depending on its specific digital marketing goals, the company can address a market with different strategies. Here, it can choose between a differentiated, an undifferentiated, and a concentrated market development strategy (Kotler et al. 2017). The distinction rests on two dimensions that are within the company’s scope of decision-making: the degree of differentiation and market coverage (Meffert et al. 2019). Figure 14.7 presents the different types of market development based on these dimensions (content based on Freter 1983; Meffert et al. 2019). Level of Differentiation

Undifferentiated

Differentiated

Complete

Undifferentiated market development (e.g. Facebook)

Differentiated market development on total market (e.g. PayPal)

Partial

Concentrated market development (e.g. Baidu)

Differentiated market development on submarket (e.g. Walmart online)

Market Coverage

Fig. 14.7 Different types of market development. Source: Wirtz (2008, 2016a)

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With regard to the degree of differentiation, the management of a multichannel digital marketing system particularly needs to clarify whether to implement the various digital marketing instruments of the digital marketing mix identically for all marketing channels or whether to design the instruments according to the specific segments. In respect of market coverage, the company has to determine how many of the segments identified it needs to address. Here, the company can either aim at the overall market or position itself as a niche supplier in a submarket. A key consideration in the context of market coverage for multichannel digital marketing is whether the company should use all potential digital marketing channels or focus on a few channels. The undifferentiated market development strategy neglects differences among individual market segments and focuses on a single digital marketing program (Ahlert 1996). This strategy largely ignores differing customer preferences and rather addresses the similarities in customer needs in order to reach a preferably large market (Specht 1998). Companies that apply an undifferentiated market development strategy thus address a mass market by using a uniform offering in combination with mass distribution channels and advertising. In this context, a good example is Facebook that addresses the total market by means of an undifferentiated approach. The differentiated market development strategy aims at designing the digital marketing mix according to the specific market segments, in order to provide all attractive market segments of a relevant product or service with the demanded products or services (Kumar 2004). This is reflected, for instance, in different products, prices, payment and delivery conditions, and communication relationships. In principle, a differentiated market development strategy allows to use the instruments for both the overall market and selected market segments (submarket). Accordingly, the degree of market coverage represents a distinguishing characteristic within the framework of differentiated market development. Examples in this context are the companies PayPal and Walmart. While PayPal follows a differentiated approach on the total market, Walmart online focuses on the US submarket. The concentrated market development strategy aims at gaining a strong position for the company in a submarket or niche market. The company therefore focuses its digital marketing tools on a particularly profitable market segment. However, within the segment the company follows an undifferentiated approach. Thus, the concentrated market development strategy only differs from the undifferentiated market development strategy by its extent of market coverage. Companies pursuing a concentrated market development strategy need to ensure that their product and service offer is tailored to the segment. While this requires comprehensive knowledge of the specific needs of the market segments and a strong brand, the company hopes to achieve a more effective and efficient market development (Bowersox and Cooper 1992). A good example in this context is Baidu that focuses on the Chinese or Asian submarket. In addition to the fundamental decision for a specific market development strategy, a company has to decide which specific strategies it wants to use to address

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its competitors and customers. While competitive strategies are concerned with the long-term plans of a company with regard to its own behavior toward its competitors, customer-focused strategies seek to achieve a privileged position for the company with regard to the customer, since this increases the likelihood that the customer will also prefer the respective company when making a purchase decision. Which competitive or customer-focused strategies a company ultimately applies and how it addresses the market depends very much on the market situation and the company’s beliefs and orientation. Yet, deducing potential strategies is a very important step in the process of finding and designing an adequate digital marketing strategy. Once the company has deduced relevant strategic options, it needs to assess them in order to determine the most appropriate and expedient digital marketing strategy. The assessment of strategic options is the next step within the process of designing a digital marketing strategy. In order to carry out a reasonable selection of strategic options, a corresponding assessment based on selected criteria is necessary in advance. In this context, the most frequently used criteria in literature and practice are expediency, goal achievement, feasibility, and the fit of the digital marketing strategy (Laudon and Traver 2020; Schneider 2017). The evaluation criterion expediency serves to assess the extent to which the digital marketing strategies to be examined are suitable to achieve the desired digital marketing goals. In particular, it is about determining the strengths or weaknesses of the digital marketing strategy considered. Among other things, a company has to check whether the digital marketing strategy takes into account the interests of all relevant stakeholders and whether it is compatible with the corporate logic including the digital business vision and mission. In contrast to expediency, the criterion goal achievement focuses exclusively on the assessment of financial goals. For this purpose, there is a variety of procedures to calculate the financial success of a strategy by means of different key figures. The most widely used method in this context is the discounted cash flow approach in which expected future cash flows are discounted to the measurement date (present value) by means of the cost of capital. An important advantage of such value analyses is that the clearly defined calculation formulas ensure good opportunities of comparison. However, their weakness is that they have great difficulties to anticipate future market and corporate developments. Due to the strong dynamics of digital business, this point of criticism is particularly significant within the Internet economy and thus also in digital marketing (Welge et al. 2017). The evaluation criterion feasibility refers to the resources required in order to fulfill the strategy. In addition to material resources, other resources in the context of digital marketing particularly include business and digital marketing skills and knowledge that are necessary in order to successfully apply a digital marketing strategy in the market. For instance, if a digital commerce company seeks to expand globally, it particularly requires country-specific knowledge and skills besides the respective IT capabilities (e.g., legal situation, customs, language skills, and distribution capability).

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The last evaluation criterion pertains to the fit of the digital marketing strategy that describes the continuous and consistent alignment between the digital marketing strategy and the corresponding measures. In particular, digital marketing strategies that contain various elements demand analysis and evaluation with regard to their fit. Here, a company needs to examine the extent to which the individual elements of the digital marketing strategy fit together (intra-digital marketing strategy fit), the extent to which elements of the digital marketing strategy harmonize with the related system components (digital marketing strategy system fit), and finally whether the digital marketing strategy elements of the entire system are inwardly and outwardly consistent (intra-system fit) (Scholz 1987a). Based on the above-described evaluation criteria, a company can finally assess the strategic options available. Figure 14.8 presents a digital marketing evaluation matrix through which companies can systematically assess and compare the relevant digital marketing strategies. Evaluation Criteria

Overall Assessment for Each Digital Business Strategy

Strategic Options

Fit of Expedience of Feasibility of Goal Attainment of Digital Marketing Strategy Digital Marketing Strategy Digital Marketing Strategy Digital Marketing Strategy

Digital Marketing Strategy 1

Digital Marketing Strategy 2

Digital Marketing Strategy 3

Overall Assessment for Each Evaluation Criterion

Legend: Very Poor

Poor

Neutral

Good

Very Good

Fig. 14.8 Digital marketing evaluation matrix. Source: Wirtz (2013a, 2020a)

In the last step of the digital marketing development process, the company can then select and define the most appropriate digital marketing strategy for achieving its marketing and business goals. The digital marketing strategy is an important point of reference for a company’s digital marketing activities and has a great impact on the design of the digital marketing mix. The following section therefore addresses the digital marketing mix and its four key components, namely, digital distribution, digital pricing, digital products/digital services, and digital communication.

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Digital Marketing Mix

Digital business plays an important role in all areas of the marketing mix, bringing forth completely new distribution channels, product types, and communication measures. Therefore, this section addresses each component of the digital marketing mix, including distribution management price management, product and service management, as well as communication management.

Digital Distribution Modern information and communication technologies can significantly change the distribution of goods. Digital business provides an additional digital distribution channel that enables customers to make purchase decisions based on digitally transmitted information. In addition, customers also place an order digitally. The provision of the product or service takes place dependent on its characteristics via traditional distribution channels or directly via the Internet. Companies can use the Internet as sales channel for both direct and indirect sales. Against this background, digital distribution can be defined as follows. Definition of Digital Distribution (Wirtz 2001a, 2020b) Digital distribution refers to the exercise of value-adding activities in the distribution value chain in a digital distribution channel. While digital distribution in the strict sense describes the digital provision or transfer of a good to the customer, digital distribution in a broader sense pertains to a situation in which the exchange of information and ordering takes place digitally but the provision of the goods occurs by physical means. Following this definition, all material and immaterial real goods whose production and consumption are institutionally separated constitute the subject of distribution (Jelassi and Enders 2008). The task of distribution management therefore ultimately refers to the ideal design of the distribution value chain illustrated in Fig. 14.9 to permanently provide the respective goods on the market (content based on Wirtz 2000b).

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Sales Presentation

Core tasks • Presentation of products and its equipment features

Information and Communication

Digital Marketing and Electronic Commerce

Financing and Payment

Product Provision

Consulting and Service

• Provision of purchaserelevant information to customers

• Provision of products that meet customer needs

• Handling of product financing and payment transaction

• Tailored customer consulting and support

• Manufacturer

• Manufacturer

• Manufacturer

• Manufacturer

• Commercial enterprises

• Stationary retail

• Retail

• Retail

• Logistics providers

• Financial service providers

• Service providers

• Electronic catalog products

• Search engines

• Order tracking service

• Realtime information

• Newsletter

• Individual eshops

• Email

• Delivery services

• 24/7 service

• Email

Actors • Manufacturer (via catalogs and online presentation) • Stationary retail • Mail order business Examples • Faq • Avatars

• Bulletin boards • Avatars

• Related links

Fig. 14.9 Value chain of distribution. Source: Wirtz (2020b)

The value chain of distribution consists of five stages, namely, sales presentation, information and communication, product provision, financing and payment, as well as consulting and service. Sales presentation involves the core task of presenting the products and its equipment features. Here, relevant actors are manufacturers, stationary retail, and the mail order business. Digital distribution-specific elements are, for instance, digital product catalogs and individual digital shops. The core task within the stage of information and communication refers to providing purchaserelevant information to customers, which is usually performed by manufacturers or commercial enterprises. In this connection, digital distribution-specific elements are search engines, FAQ, email, avatars, and related links. The stage of product provision addresses the provision of products that meet customer needs. Here, the relevant actors are manufacturers, stationary retail, and logistics providers. The digital distribution-specific elements are, for instance, ordertracking service or delivery services. In the stage of financing and payment, the core task pertains to the handling of product financing and payment transaction. Manufacturers and retail and financial service providers are the relevant actors in this context, and digital distribution-specific elements include real-time information and 24/7 service. Finally, the stage of consulting and service involves the tailored customer consulting and support. Here, manufacturers and retail and service providers are relevant actors in performing this core task. Digital distribution-specific elements in this context are, for instance, newsletter, bulletin boards, email, and avatars.

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Against this background, companies have different channels of distributions available. Here, they have to generally decide whether to involve retail companies or not and thus whether to follow an indirect or direct sales approach. While in an indirect sales approach retail companies selected by the manufacturer deliver the goods to consumers, there are no intermediaries between the manufacturer and consumers in a direct sales approach (Wirtz 2008). Figure 14.10 depicts a direct and indirect sales approach, presenting potential intermediaries between manufacturer and customer (content based on Wirtz 1995b).

Manufacturer

Manufacturer

Manufacturer

Manufacturer

(Specialist) Wholesale

Customer

Direct Sales

Wholesale

(Assortment) Wholesale

Retail

Retail

Retail

Customer

Customer

Customer

Indirect Sales

Fig. 14.10 Direct and indirect sales. Source: Wirtz (2020b)

However, most companies use both direct and indirect sales channels, thus following a multichannel approach in distributing their products and services. Traditional offline companies, for instance, exploit the Internet as additional distribution channel. In this connection, Turban et al. (2018) speak of “Bricks-and-Clicks,” although the term “Clicks-and-Mortar” is more common (Turban et al. 2018, p. 110). Sometimes this multichannel strategy is also referred to as hybrid distribution. An example of a company that uses such a multichannel strategy is the multinational group IKEA. IKEA connects different online and offline sales channels such as Internet sales, mail order business, and stationary retail, thus providing customers with a multimedia shopping experience, who in turn can choose the sales channel that best suits their needs. When purchasing a product, customers often use more than one channel. For instance, customers frequently use the Internet to inform themselves about a certain product and then buy the product at stationary retail store. Figure 14.11 shows how customers can access IKEA’s online shop and at the same time can order their traditional print catalog.

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Webshop functionalities

Online order of traditional print catalog Fig. 14.11 Multichannel strategy of IKEA. Source: IKEA (2018)

Digital business has significantly changed the structures of distribution. The characteristics of digital distribution give rise to two opposing development trends: intermediation and disintermediation (Gay et al. 2007; Harrington and Reed 1996). Both trends particularly result from the possibility of efficiently handling transactions in digital business and thus from the low transaction costs compared to traditional exchange transactions. A clear development in one of the two directions is not discernable. One can rather expect that both approaches will gain acceptance in practice. The term intermediation describes the circumstance that the value chain of distribution can be broken down by using modern information and communication technology (Evans and Wurster 1997; Papazoglou and Ribbers 2006). This allows companies to focus on core competencies and outsource the remaining strategically less important activities of the entire distribution to cooperation partners (Tomczak et al. 1999). Here, strongly specialized companies take over a specific area of value creation. This concentration of core competencies enables companies to realize cost savings and specialization gains. Companies can reinforce this effect by building a cooperation network with providers of complementary value activities. Figure 14.12 illustrates the breakdown of the distribution value chain in the context of the intermediation (content based on Wirtz 2000b).

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Company A Product Presentation

Information and Communication

Product Provision

Financing and Payment

Consulting and Service

Product Presen tation

Information and Communication

Product Provision

Financing and Payment

Consulting and Service

Company A

Company B

Company C

Company D

Company E

Fig. 14.12 Development trend of intermediation. Source: Wirtz (2020a)

Disintermediation represents a development trend that is opposite to that of intermediation. In the context of disintermediation, intermediate stages are increasingly eliminated within the distribution chain, so that it is a single provider that increasingly coordinates the distribution activities (Gay et al. 2007; Wirtz 1995b). Therefore, the possibility of disintermediation particularly results from the use of modern information and communication technologies, since only these enable the necessary coordination of the distribution activities and, consequently, a reduction of the distribution costs by optimizing the distribution value chain (Chen 2005). The elimination of traditional intermediaries is a typical example of the disintermediation trend and entails an existential substitution risk for the entire field of retail (Wirtz 1995b; Laudon and Traver 2020). Accordingly, “[t]he Internet can connect end users with producers directly and thereby reduce the importance of (and value extraction by) intermediaries” (Quelch and Klein 1996, p. 66). The complete substitution of traditional distribution in the sense of disintermediation only affects a limited number of companies. For instance, the company Cisco was able to create new business services by combining industry knowledge and technological expertise. However, the direct sales approach does not live up to all consumer needs in the purchase decision. This applies particularly to complex products in need of explanation, where the direct supplier-buyer exchange continues to play a decisive role in purchasing. Furthermore, the distribution design depends on further characteristics of the product or service. Companies can distribute particularly information-based and highly standardizable products or services via the digital part of the distribution channel (Kiang et al. 2000; Rayport and Sviokla 1995). If companies cannot entirely digitize their products or services, they can separate the information-based components from the remaining physical product or service and offer them apart via the digital distribution channel.

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While information activities and the sale take place digitally, the physical product is shipped via the physical part of the hybrid distribution channel. Figure 14.13 exemplifies in which industries online distribution may support or substitute retail (content based on Wirtz 2000b). Low

High

Digital Distribution • DIY markets • Mechanical engineering • Automobile • Software • Music • Travel

• Insurance • Banking Services

Physical Distribution Low

High

Fig. 14.13 Substitution relationship between physical and digital distribution. Source: Wirtz (2020b)

In this context, there are different actors that participate in the physical and digital distribution of a product or service within a distribution channel. Although the traditional retail value chain is mainly maintained, digital business changes the roles and functions of the transaction and interaction partners involved. Against this background, it becomes apparent that new actors emerge or the roles and functions of traditional players change due the characteristics of digital distribution (Wirtz and Defren 2007). Traditional actors can be involved directly and indirectly in the distribution of a product or service. In the context of direct distribution, there are mainly two different actors. Since this type of distribution refers to an immediate interaction between the manufacturer or producer and the consumer, they are the key actors in the direct distribution channel. In addition to producers and consumers, there may be intermediaries that support the distribution in every stage of the distribution (Wirtz 2008). Moreover, there are further actors in the context of indirect distribution. The indirect distribution of a product or service implies that there is at least one sales intermediary between the producer and consumer. Sales intermediaries differ depending on the characteristic of the product or service and the distribution goals. They can be differentiated according to the distribution stages wholesale and retail.

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Indirect distribution may also involve intermediaries in terms of sales assistants that support sales in every distribution stage. In addition to these already established actors, new actors are increasingly emerging in the context of digital distribution, whose business models make use of the opportunities of digital business. Accordingly, these new actors become potential competitors of the traditional actors. They control a major part of the distributive value creation and offer services that are competing with those of traditional providers. An example is the Internet retailer Amazon that presents its offers exclusively online, complementing it with innovative services such as book recommendations or user reviews. Physical delivery is handled both by in-house divisions and specialized logistics service providers. Physical on-demand distributors become potential business partners of traditional actors, as these service companies usually focus on their respective core competencies and offer value creation activities, which complement those of traditional actors. As a result, the principals are exempted from establishing necessary competencies and resources in logistics management. Examples of on-demand distributors are the logistics service providers United Parcel Service (UPS) or Federal Express (FedEx) that are cooperation partners of Amazon in the context of physical distribution. Figure 14.14 depicts the business actors of digital distribution, demonstrating their functions and importance, as well as giving respective examples (content based on Wirtz 2000b).

Fig. 14.14 Business actors of digital distribution. Source: Wirtz (2020b)

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The use of information and communication technologies thus enables improved service quality for customers in the areas of product provision and merchandise management, as transparency in these segments has increased significantly. In this connection, order-tracking systems have become a popular tool in the context of digital distribution for customers and companies. Accordingly, many companies have already implemented order-tracking systems. FedEx, for instance, provides an order-tracking system that is characterized by various order-tracking solutions, allowing the customer to directly check the performance quality and commitment of a provider by requesting the delivery or processing status online. Logistics service providers increasingly offer mobile solutions for order tracking, for instance, in the form of apps. In addition to the value added for the customer, these systems also bring along cost savings for companies by reducing respective customer queries by phone.

Digital Pricing Having presented core aspects of digital distribution, the following section addresses price management in the context of digital business (digital pricing) as another important action parameter in digital marketing. Digital pricing plays a crucial role because it affects both the amount and value component of sales, which is one of the major corporate objectives. The task of price management is to determine the ideal price and establish it in the market. Here, companies need to take into consideration the reaction of current and potential competitors because consumers assess their prices not only in absolute terms but also in relative terms compared to those of other companies. Thus, the main difficulty of successful pricing refers to the circumstance that consumers’ individual willingness to pay is unknown to companies but at the same time constitutes a core variable within the pricing process. Based on these deliberations, the process of pricing in digital business can be defined as follows. Definition of Digital Pricing (Wirtz 2010b, 2020b) Digital pricing refers to the deliberate setting and continuous management of prices within digital markets. Pricing has been updated and advanced in the context of the Internet economy. Within the scope of pricing, companies have different measures at their disposal, including price differentiation, non-linear digital pricing, price bundling, and dynamic digital pricing. Figure 14.15 summarizes these types of digital pricing.

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Price differentiation

Non-Linear digital pricing Types of digital pricing Price bundling

Dynamic digital pricing

Fig. 14.15 Types of digital pricing. Source: Wirtz (2000c, 2010b)

Price Differentiation The first type of digital pricing is price differentiation. Here, companies sell the same or very similar products to different consumer groups at different prices (Laudon and Traver 2020). These consumer groups can be created by means of specific criteria or implicitly through the respective rate. The main goal of price differentiation is profit increase by skimming the varying willingness to pay of the different consumer groups. The stronger the potential differentiation, the better a company can skim off the individual willingness to pay. In addition, price differentiation can help companies to temporally straighten consumer demand and to optimize the required production capacities. Price differentiation can be realized by means of different criteria. In general, one can distinguish between spatial, temporal, and quantity- and performance-based price differentiation (Gay et al. 2007). In the context of temporal price differentiation, a company offers a widely identical good at different prices at different times. Here, it is implicitly assumed that there are customer groups that have a particularly high or low willingness to pay for a product or service at a certain time (Hanson and Kalyanam 2007). However, a temporal price differentiation does not necessarily have to refer to a certain point in time but can also occur through a temporal delay, especially in the case of information. In the context of customer-oriented price differentiation, companies form customer groups according to customer-specific characteristics, including gender, age, or affiliation to a social group. For instance, there are often price reductions for students for tickets or newspaper subscriptions. However, certain sociodemographic characteristics such as color or religious confession are illegal, unethical, or not possible (Hanson and Kalyanam 2007). A frequently used criterion for price differentiation is purchase quantity. This approach follows the following principle: the higher the ordered quantity, the lower the price of the product, so that there is no continuous linear-proportional correlation between the delivered good and the price demanded. There are two forms of quantity-based price differentiation. On the one hand, the price differentiation may refer to the ordered quantity of a transaction, which is particularly the case in digital business when it comes to the distribution of physical products. On the other

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hand, the quantity-based price differentiation can pertain to an ordered amount in a specified period of time (Meffert et al. 2019). This variant is particularly present in the B2B context since suppliers often give a quantity-dependent discount at the end of a period. In this connection, retailers pursue two major objectives. On the one hand, they can increase customer market share because the customers have an incentive to cover their requirements through a single supplier. On the other hand, this type of price differentiation impedes the market entry for other companies because the latter would have to give the customers a similar discount without being able to benefit from the previous order quantity. Another type of price differentiation is performance-based price differentiation, which is a viable option when the market can be divided into customer segments that have different performance expectations toward a product or service. In order to use these differences, companies can differentiate both the scope of performance and the price. Performance-based price differentiation seeks to design the scope of performance of a product or service in a way that meets the individual needs of the customers and that represents the customers’ individual willingness to pay.

Non-linear Pricing Non-linear pricing refers to situations in which there is no proportional relation between a service and the demanded price (Wilson 1993; Turban et al. 2018). Just like in the case of price differentiation, the objective of non-linear pricing is to make a profit by skimming the consumers’ individual willingness to pay. However, the approaches clearly differ. In the case of price differentiation, a company determines fixed criteria for creating segments, which are then approached by different prices. While the quantity only is relevant with regard to one selected criterion in this case, non-linear pricing exclusively rests on the sales quantity (Wirtz 2001a).

Price Bundling Another type of pricing is price bundling, which refers to the compilation of products and the corresponding pricing (Adams and Yellen 1976; Laudon and Traver 2020). There are three different forms of price bundling, including pure bundling, mixed bundling, and unbundling. While pure bundling describes the sale of products exclusively in bundles, mixed bundling additionally contains the possibility to sell the products separately (Wirtz and Lütje 2006). The term unbundling applies when products are offered separately. In the narrower sense, this approach is not a bundling strategy but shall be used complementary in order to describe a closed system of price bundling strategies. In the context of pure bundling, companies offer different products only in bundled form at a fixed price. Thus, customers cannot choose particular preferred features, even if other features are less or not important to them. This reflects one of the main effects of price bundling because it enables the transfer of the consumer surplus (Schmalensee 1984). Furthermore, mixed bundling is an opportunity to make use of the advantages of bundling and at the same time to avoid its disadvantages. The term mixed bundling

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generally refers to the provision of single products and bundles (Adams and Yellen 1976). The consumers can thereby choose which form they want to purchase. Since the bundle price is normally much lower than the sum of the individual prices, consumers will usually not buy all single products that are included in the bundle (Olderog and Skiera 2000). The mixed bundling strategy solves the exclusion problem of the pure bundling approach by offering consumers with a different individual willingness to pay the opportunity to acquire only some of the features. In digital business, price bundling is particularly important in the context of information goods because of their very low marginal costs in the distribution via digital networks. Hereby, companies can use the advantages of price bundling without risking substantial disadvantages (Laudon and Traver 2020). All pricing methods considered so far are static. This means that they are not responsive to time-dependent changes in the environment of the purchasing process, which can result in disadvantages, especially in the very dynamic environment of digital business. Dynamic pricing eliminates these deficits by responding to changes and adjusting pricing to them (Gay et al. 2007; Schwartz 1999). The literature essentially deals with three dynamically changing components that influence the price. These are the objective function of a company, the costs of manufacturing a product, as well as the market and competitive situation. An objective function is dynamic when a company does not act in a time-indifferent manner with regard to the sale of its products (Rosenberg 1977). This is the case, for instance, when a company expects an increase in corporate taxes and therefore wants to sell as many products as possible before this increase, since their after-tax profitability is higher than that of the products sold later. This may have consequences for pricing, which bundles demand for the period before the tax change. Considering the manufacturing costs of a product, it is generally assumed that these decrease over time due to learning effects, potentially changing the optimal price. The dynamics in the market and competitive situation result from the life cycle of products and the general competitive dynamics, dynamically changing the price-sales function of a product over time.

Dynamic Pricing The task of dynamic price management is to react specifically to changes and adjust pricing in line with corporate objectives. Of the three components mentioned, changes in the market and competitive situation are most relevant, as fundamental changes have occurred in this area resulting from the Internet economy. The structure of the two other components has not changed significantly through digital business and should therefore not be further elaborated. Due to the ever faster changing environment, the requirements for dynamic pricing mechanisms are constantly increasing. A central dynamic pricing instrument for digital business is auctions (Laudon and Traver 2020). An important advantage of auctions is that they offer a standardized mechanism that makes purchases and sales centrally visible on a market (Lee 1996). In addition, auctions are able to form prices flexibly when supply and demand meet in dependence of market and competitive conditions, thereby fulfilling four essential functions. In an English auction, the bidding process starts with a minimum

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bid and the bid is gradually increased. Each participant can bid several times and outbid his own bid. The end of such an auction depends on the organization. In traditional markets, bidders meet at a fixed location and place bids until only one bidder remains. The price results from the highest bid (Gay et al. 2007). In the digital markets of digital business, this form of personal meeting is omitted. In addition, it is not clear how many participants are present at the auction. Therefore, English auctions on the Internet are usually subject to time restrictions, so that the auction ends at a predetermined time and the price corresponds to the highest bid submitted to date. An Internet auction is able to address a very large number of potential bidders compared to a real auction and thus to significantly increase the efficiency of this pricing mechanism. This is a major reason for the widespread use of English auctions on the Internet. The Dutch auction is a counterpart to the English auction. Initially, a very high price is set and then reduced in the course of the auction until the first bidder interrupts the price reduction mechanism and accepts the current price. Dutch auctions often use a price clock for continuous price reduction, which the auction participants can stop if the price is accepted (Laudon and Traver 2020). In reverse pricing, the price is set not by the seller but by the buyer. The seller does not provide a minimum bid or initial price but accepts offers from the buyer (Leonard and Riemenschneider 2008; Schneider 2017). This form of auction therefore has similarities with tendering procedures. There are various auction procedures based on reverse pricing. In the course of a maximum price auction, one side of the market—generally the buyers—makes a sealed, secret bid to the other side of the market. In this context, one also speaks of a hidden auction or sealed bid first price (Schneider 2017). At the end of the auction, all bids are opened simultaneously and the highest bid wins. The maximum price auction is not a dynamic procedure, since the bidders are not allowed to change their bid after the opening or to submit another bid. The maximum price auction can also take place in such a way that a product is sold to several bidders at their individual maximum price. Maximum price auctions are rare on the Internet due to their comparatively complicated process. A slight modification of the maximum price principle is the Vickrey auction (Clement et al. 2019). This auction type principally proceeds like a maximum price auction, but the product is sold to the highest bidder at the bid of the second highest bidder. This creates an incentive for the bidder to bid above the personal maximum limit, as the bidder knows that he or she will have to pay a lower price when the bid is accepted.

Digital Products/Digital Services The product and program policy of the classic marketing mix has been updated by modern information and communication technology. Some of these changes also include services that are treated as digital services in this context. Modern information and communication technologies have the potential to fundamentally influence the product and program policy in companies. These changes particularly refer to the

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action parameters of product and program policy. This opens up a wide range of opportunities for using modern technologies to efficiently design processes. In addition, the use of digital business can also open up numerous new, more far-reaching opportunities in the area of product and program policy. Against this background, digital product and program policy is defined as follows. Definition of Digital Product and Program Policy (Wirtz 2001a, 2020b) Digital product and program policy involves the use of modern information and communication technologies, in particular the Internet, in all phases of the product and program policy. The products and services addressed by digital business can be divided into three categories (see for the following Gay et al. 2007). One can distinguish between physical products, services, and digital products, which in turn can be further broken down. In this context, a distinct categorization is difficult because products and services can be available in several forms and the differences between service, product, and information in digital business are often fluent. In addition, combinations of product and service or of digital products with physically tangible elements are possible. Figure 14.16 • Products with tangible features Physical

Traditional Product

• For instance, MP3 player, flowers • Products without physical features

Non-Physical

• Services • For instance, insurances, music

Digitization • Product only exists in digital form By Composition

Digital Product

Digitally Presentable Products

• Ideal for distribution via Internet • For instance, software

• Product only exists in digital form, but has a tangible feature (e.g. flight or ticket) • Product can be digitized and therefore can be available in digital and physical format (e.g. newspapers)

• Information as product with monetary value Information

• Three online versions: (1) Only online transmission (2) Complete online conception (3) Information that is only created by online request

Fig. 14.16 Categorization of product and services in digital business. Source: Wirtz (2010b, 2020b)

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illustrates the complex structure in the digital business of tradable products and services (content based on Gay et al. 2007). Physical or tangible products are those products that have material product characteristics and can therefore be grasped by sensory perception. Due to this property, such products always need to be provided physically and cannot be digitized, since they lose their physical product properties through digitization (Choi et al. 1997). Nevertheless, these products are sold very successfully via the Internet. One example is Apple’s iPhone. In digital business, such products are usually linked to value-added services such as product shipping, warranties, or online support. Nonphysical or intangible products are those products that do not have a material appearance. These include products such as music or software. Digitizing nonphysical products is usually unproblematic, which is why they are particularly suitable for digital business and are usually available in digital form today. In addition, services that have long been neglected in the literature on digital product and program policy should also be mentioned here, although digital services in particular have become considerably more important in recent years (Laudon and Traver 2020). Examples of digital services include the online distribution of insurance policies or air travels. Digital or digitized products and services are particularly characterized by the fact that they can be transmitted digitally and are therefore ideally suited for direct distribution via the Internet. This makes it possible to implement digital distribution in the narrower sense. Differentiation is also possible for digital products. Here, one needs to distinguish whether the digital product is basically only available in digital form, as is the case with software or music or whether the product can be available both in digital and physical forms, as is the case with a newspaper with an online edition. The third manifestation of digital products is information (Gay et al. 2007). In this context, information can be subdivided according to whether it was created for offline purposes and the Internet only functions as a transmission medium or whether the information was designed directly for online presentation and transmission. In addition, online information can only be created due to an online request. Furthermore, services are becoming increasingly important in digital business. Here, one can distinguish between service offerings that accompany a product (value-added services) and stand-alone services (Wirtz and Olderog 2002). Valueadded services primarily have a differentiation function. By offering a range of services in addition to the core services, they seek to set themselves apart from competing products in order to realize a competitive advantage. Typical examples of value-added services are consulting and information services as well as training and further education courses, which are related to the core service. By contrast, stand-alone services are primary service offers, i.e., offers that do not serve as a supplement to another (core) service. Here, the service itself forms the core service. An example of this is Yahoo.com that offers an online service that is not linked to specific products. A second distinguishing criterion is based on the costs associated with the service offer. Here, one can differentiate whether the service

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Variable Costs

No Variable Costs

must be created individually causing variable costs or whether the service can be created independently from the number of users without or with only negligible low variable costs (Shapiro and Varian 1999; Wirtz and Olderog 2002). An example of the first case is an individual training offer where the course instructor is in direct contact with the customer, for instance, by email or videoconference. An example of the second case is Yahoo.com. Based on the above-mentioned criteria, a matrix can be developed to classify the individual services offered. Figure 14.17 illustrates this matrix (content based on Wirtz and Olderog 2002).

• Stock price information and business news of online broker (e.g. Merill Edge, WellsTrade)

• Search engines (e.g. Google, Bing)

• FAQs

• Price comparisons (e.g. PriceGrabber)

• Trouble-shooting guides

• ...

• Financial information (e.g. Bloomberg, MarketWatch)

• Standardized newsletters • ...

• Individual product trainings • ...

• Insurance comparisons (e.g. The Zebra, GasBuddy) • Product-independent individual training offers • ...

Value-Added Services

Stand-Alone Services

Fig. 14.17 Value-added service. Source: Wirtz (2020b)

Services that do not cause variable costs are of particular importance in digital business. This is because the willingness to pay, at least on the part of private consumers, is rather limited. Accordingly, the allocation of variable costs to consumers is often out of the question. The popularity of these value-added services has produced a very large variety of services in digital business. The core aspects of the product and program policy are decisions concerning the introduction of new products (product innovations), the variation and maintenance of existing products on the market (product variation), the segment-specific supplementation of existing products (product differentiation), and the exclusion of products from the product program that are no longer economically viable (product elimination). Another important action parameter of the product and program policy refers to the packaging design. Although the basic framework for action has remained the same, in some cases digital business has considerably changed the individual action parameters of the product and program policy. The action parameters of the digital

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product and program policy differ from those of traditional product and program policy in particular in that many processes can be handled much more efficiently by means of modern information and communication technologies. This is especially due to the improved availability and processing of information. This can be seen as a great advantage, particularly in the context of the product and program policy, as many decisions in this area require diverse and complex information. The following section describes the action parameters in detail and their changed importance in digital business. Figure 14.18 represents the four most important action parameters of the product and program policy.

Product Innovation • Development of new products • Market innovation: General new problem solution • Business innovation: Firsttime use of a technical innovation that is already available in the market

Product Variation

Product Differentiation

Product Elimination

• Preservation of • Preservation of • Removal of product in its basic product in its basic products from conception conception product line

• Substitution of previous product by modified product

• Supplementation of product line with modified products

• Adaptation of products to changing consumer needs

• Adaptation of products to specific demands of different target groups

• Allocation of scarce resources to succesful products

• Process of product innovation undergoes several subsequent stages

Fig. 14.18 Action parameters of the product and program policy. Source: Wirtz (2010b, 2020b)

Product Innovation Product innovations are those changed processes in a company that lead to the development of new products. Due to increasing signs of saturation and competition, product innovation is of outstanding importance in the context of product and program policy, especially in digital business. Against this background, innovations are a necessary condition for the success and growth of a company. The innovation activity of companies also plays an important role from a macroeconomic point of view, since innovations are considered carriers of economic growth. In order to classify a product innovation, four innovation dimensions can be used: subject, intensity, time, and space. In this context, particularly the subject dimension will be explained in more detail (Meffert et al. 2019). Here, one can distinguish between market innovations and operating innovations.

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Market innovations are basically new problem solutions that master a task in a completely new way or satisfy a need for which there was so far no concept. By contrast, operating innovations are innovations in which a company uses a technical novelty for the first time, regardless of whether other companies are already using it or not. Here, there is usually a minor modification of the products, for example, in their exterior design or in an improved fulfillment of function. When presenting product innovation in the context of the digital product and program policy, a distinction must be made between products and services whose development would be principally conceivable without digital business and those products and services whose development is only triggered by the Internet. In the first case, digital business is neither the precondition nor the reason for innovation. Nevertheless, the use of modern information and communication technologies in the innovation process is also advantageous here. In particular, this enables a more efficient design of the process (Fritz 2004). The innovation process described in the following strongly rests upon the classic innovation process. However, there are numerous possibilities for using digital business at the individual stages of the process. The process of product innovation in companies can be divided into consecutive phases (Verganti 1997). The first phase serves to find and select ideas. Based on this, the development of product concepts or prototypes can take place in a second phase. After a test phase, the products can finally be introduced. Customers play a particularly important role in the generation of new product ideas in digital business. The Internet opens up numerous possibilities for costeffective interaction and communication with customers, through which the procurement of solution information in digital business can be realized much more costeffectively (Wirtz 1995b). Examples include email-based feedback systems, discussion forums initiated by the company, and social media communities. However, not all customers are equally suitable for integration into the idea generation process (von Hippel 2010). Depending on the industry, 10–40% of customers are interested in active participation in the processes of product creation and further development and can therefore be integrated into these processes by the company (Reichwald and Piller 2009). These customers are referred to as lead users in the literature. Digital business has considerable support potential when it comes to the generation of new product ideas. The consistent use of digital instruments increases efficiency and leads to cost advantages. The significantly reduced transaction costs are also particularly noteworthy. In addition, the Internet provides access to a wide range of information that was previously either unavailable or would have been too expensive to obtain. The potential to better coordinate the various internal and external sources is especially relevant in this context. Digital business particularly supports the application of creativity and group techniques. Creativity techniques can be applied in digital business at the group level without the group members actually physically coming together (Wirtz et al. 2008).

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In addition, it is no longer necessary for group members to participate in idea generation at the same time. Group creativity techniques, such as the Delphi method, can also be carried out effectively via email or special Internet-based applications. The achieved independence of place and time allows the efficient application of group creativity techniques. This includes minimizing or avoiding travel costs as well as minimizing disruption to the usual work processes due to the independence of time. Figure 14.19 shows the example of a software for the production and administration of digital mind maps.

Brief Introduction

Use Cases

Information for Selected Use Case Example

Fig. 14.19 Creativity techniques in digital business. Source: Mindmeister (2019)

In addition to the opportunities inherent in digital business to increase efficiency in the product innovation process, digital business is also the basis for numerous innovations. The Internet has proven to be an outstanding driver of innovation in recent years. In addition to the constant demand for adapted software and hardware products, many business models, especially in the area of digital services, have only become possible through the Internet and its dissemination. One product innovation that became very successful within a very short time is the tablet computer that is particularly designed for the mobile use of the Internet. The new device class started at the beginning of 2010 with Apple’s iPad. Today, tablets close the gap between mobile notebooks/netbooks and smartphones.

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Finally, there is also room for innovative offers in the service area on the Internet. The widespread use of the Internet is creating an increasing demand for such services. In addition, the Internet is often the first place to offer such services. Examples of innovations in this area are search engines or software agents. These support the user by providing navigational assistance and classifying information or by identifying offers that are favorable to the user. There is a wide field for further innovations in the area of Internet-based services, so that companies with innovative ideas can establish themselves in this area. An example of such a digital service is a price search engine that allows users to search for the cheapest price of a product or service in online shops. Only the inexhaustible number of offers on the Internet and the easy automated evaluation of these digital data made the service price comparison possible. The aggregation of the large amount of information represents the core value for customers. Today, further innovative services such as shopping agents or price alerts usually complement the service program of a price search engine (e.g., PriceGrabber). In summary, it can be stated that digital business changes the innovation process in such a way that efficiency advantages can be realized in all phases. In addition, digital business also offers numerous innovation potentials, since the diffusion of modern information and communication technologies, especially the Internet, creates new needs that can only be met by innovative products and services.

Product Variation and Product Differentiation The terms product variation and product differentiation refer to two similar action parameters of the product and program policy. An essential characteristic of these action parameters is that the product is retained in its basic concept. The changes can be based both on certain properties of the product itself (e.g., aesthetic, physical, or functional properties) and on additional services or value-added services (Meffert et al. 2019). In particular, such additional services play a decisive role in the context of digital business. Product differentiation differs from product variation in that modified products complement the company’s product range, i.e., the company creates offshoots of existing products (Scheuch 2007). The aim is to meet the specific requirements of different target groups on the market. Product differentiation can also be based both on certain product characteristics and on value-added services, so that there are basically similar possibilities as in the area of product variation. The processes of product variation and product differentiation are similar to the process of product innovation. Just as with product innovation, the acquisition and evaluation of ideas is of great importance in connection with product variation and product differentiation. However, the decision complexity and need for information are much smaller here.

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Moreover, the Internet also offers opportunities for increasing efficiency in the context of product variation and differentiation. Accordingly, companies can also effectively use the Internet to generate and evaluate ideas. In addition, they can costeffectively obtain the required data with regard to customer demands and expectations via the Internet. In addition to the efficient design of processes in product variation and differentiation, digital business also offers the possibility of adding new value-added services to existing products (Bliemel and Fassott 2000). Thus, digital business enables a comprehensive product variation or differentiation based on value-added services. In the case of information products, there are special forms of product variation, some of which have only become possible through digital business. Here, it must be differentiated whether the variation takes place only in temporal or also in factual regard. While a temporal variation of information products, known as windowing, is in principle also possible without modern information technology, the factual change by means of versioning was only made possible in an efficient manner by digital business (Albers 2000). A variation of information products was usually only possible in terms of time in the form of windowing. The classic example of this is the exploitation chain of feature films, which are also broadcasted by means of DVD, pay TV, and free TV after their cinema exploitation. Digital business also offers great support potential when it comes to windowing, for example, through more efficient coordination and avoidance of media breaks. However, its principle has not changed fundamentally. In addition to the classic exploitation channels, new distribution opportunities have been opened up through the Internet at almost all exploitation levels. In digital business, the digital nature of the service now also enables efficient differentiation from a factual point of view. The procedure known as versioning allows a digital product to be offered in different variants for different target groups (Shapiro and Varian 1999). The procedure for this is similar to the procedure for product differentiation of physical products. The first step is to identify the product characteristics that consumers classify very differently with regard to their benefits. Versioning starts with these characteristics by introducing different gradations of the characteristics. In most cases, a company creates a premium product from which it derives products for the mass market. Overall, versioning offers numerous variation possibilities for digital products, some of which are shown in Fig. 14.20 (content based on Shapiro and Varian 1999).

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Digital Marketing Mix

Features

User Interface

533

• Differing product scope (e.g. Microsoft Windows and Windows Professional)

• Different interfaces for different user groups (e.g. Photoshop Essentials/ Professional)

Delay

• Same information is presented to different user groups time-delayed (e.g. market information)

Manipulation

• Provides user groups with different rights for processing information (e.g. Acrobat Reader and Writer)

Convenience

• Certain user groups receive more convenient/privileged terms of use (e.g. Availability at peak times)

Support

• Improved support for certain user groups (e.g. improved support for subscribers)

Fig. 14.20 Selected versioning possibilities of digital products. Source: Wirtz (2010b, 2020b)

An extreme form of product differentiation refers to mass customization, which aims at developing products and services for the mass market that meet the needs of each individual consumer (Wehrli and Wirtz 1997). The costs should not be significantly higher than for mass production of an underlying standard product. Since the products are created according to the preferences of the individual consumers, this individualization results in an increased attractiveness of the products. An individualized product has an increased benefit for the consumer. A creative and successful example of mass customization in digital business is Mymuesli.com. The start-up company that has been awarded various start-up prizes has been selling individualized organic muesli with the slogan “custom-mixed cereals” since 2007. Customers can create their individual muesli based on over 80 different ingredients. Accordingly, there are many possibilities to put together a muesli at Mymuesli. com. Today, Mymuesli.com successfully sells muesli in various European countries. Figure 14.21 depicts the homepage of Mymuesli.com, showing how the customer can configure an individual muesli.

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14 Five-Step Mass Customization Process

Digital Marketing and Electronic Commerce

Display of Individual Muesli Mix

Individual Ingredients with Description

Fig. 14.21 Mass customization in digital business. Source: Mymuesli GmbH (2019)

For existing customers a configuration proposal based on previously acquired customer data (previous orders) may make the order particularly simple. New customers require detailed instructions on how to configure an individual product. Once a configuration has been found, the individual product is digitally presented to the customer with the opportunity to make changes. If no more changes are wanted, the order data are collected, whereby existing customers usually only have to confirm or update their already existing data. In the third step, the order is made and the data is automatically transferred to the company’s internal systems, such as the order management system, the PPC system, and the materials management system. A value-added service for customers in this phase can be an order-tracking system, which allows them, for example, to track the position of their orders in the queue or the start of delivery via the Internet.

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The final stage includes the after-sales phase, in which the dialogue with the customers is to be maintained in order to continuously update the customer profiles gained during the configuration and to generate potential repurchases. In this connection, questions of customer relationship management become particularly relevant. Figure 14.22 summarizes the functions performed in the context of Internet-based mass customization.

Company Website • Company presentation

• Product presentation • Initiation of transactions

Product Configuration • Existing customers: Configuration proposal based on previous orders • New customers: Detailed instruction and assistance • Digital presentation of individual products and customization opportunities

Customer Dialog

Order

• Automatic data transfer to internal application systems

• Maintenance of customer dialog in the after-sales phase

• Order tracking system as value-added service

• Update and improvement of customer profiles • Generation of repurchases

• Collection of order data

Fig. 14.22 Internet-based mass customization. Source: Wirtz (2010b, 2020b)

The computer technology company Dell (Dell.com) and the sporting goods manufacturer Nike (Nike.com) were among the pioneers of mass customization. Dell offers its customers the opportunity to create their own PC. Thereby, customers can choose from a variety of pre-built components resulting in a potentially large number of individual PCs. Due to their modularity, computers are particularly suitable for mass customization. Another example of mass customization that would be inconceivable without the possibilities of digital business can be found at Nike. Nike offered its customers the opportunity to have their sports shoes custom-made early on via the Internet. Based on Nike’s standard models, various possible variations result in a variety of combinations. Only the Internet enables customers to configure their shoes and evaluate the result visually from home. However, Nike even went one step further with its NIKEiD approach. In addition to the personalization through color design, material, or lettering, the individual sports articles can also be made available to other users. This results in a high level of interactivity between Nike and its customers as well as between the customers themselves.

Product Elimination Finally, the last action parameter of the product and program policy is product elimination. Product elimination refers to the removal of products from the product

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portfolio (Fritz and von der Oelsnitz 2006). The sense of such decisions traditionally results from the competition over resources between the individual products of a company, which are subject to limited production capacities. Elimination decisions are based on both quantitative and qualitative standards (Meffert et al. 2019). Digital business has significantly changed the importance of product elimination. The traditional assumption of resource competition is often only valid to a limited extent for digital products and digital services, which is why quantitatively motivated elimination plays only a subordinate role in this context. Particularly when it comes to informational content, the resource expenditure for maintenance, duplication, distribution, and storage of the content is only marginal. Due to their random reproducibility and the nowadays very cost-effective availability of storage space, such products are not eliminated, since they can still be offered economically despite a very low demand. The elimination of information products therefore usually rests upon qualitative criteria. This is particularly the case when a new product replaces the old one in the product program. In addition, there is also support potential for digital business within the framework of product elimination. For instance, companies can effectively use the Internet to gather information. In particular, information about the acceptance of the products by the respective target groups is of interest. Companies can obtain such information very economically due to the interaction and communication possibilities inherent in the Internet. Interactive value creation concepts are playing an increasingly important role in the Internet today. In the context of the digital product and program policy, the approaches of open innovation and mass customization are of particular importance.

Digital Communication Digital communication has become an integral part of the marketing mix in business practice. Particularly the Internet has established itself as an essential communication channel alongside the classic forms of marketing communication, providing various opportunities for companies. The digital communication policy is characterized by a broad spectrum of available communication instruments in the area of digital advertising and digital branding. These are specified in the context of the action parameters of digital communication. In order to take account of the special significance of digital branding in the overall context of digital business, this aspect of digital marketing is considered separately. The definition of digital communication is essentially an extension of the conventional definition of communication. In the present context, digital communication is therefore defined as follows.

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Definition of Digital Communication (Wirtz 2001a, 2020b) Digital communication includes interactive, multifunctional communication using network-based and electronic communication platforms. The use of digital communication makes it much easier for the sender and recipient of a message to establish contact. For customers in need of information, for example, this means that the new media enable them to obtain comprehensive information about companies and products. This collection of information can take place independently of local and temporal restrictions. In addition to the basic types of communication (one-to-one, one-to-few, one-tomany) and the distinction between one-way and two-way communication, further differentiation can be made between online and offline communication. The area of offline communication includes the traditional mass media and the offline direct communication. In contrast, online communication comprises personal and general online communication. Digital and particularly online communication is characterized by a number of specific attributes that can be used to distinguish it from traditional communication. Although these also play a role in another digital business context, they are particularly relevant for the exchange of information via digital channels and thus in the field of digital communication. A decisive difference between conventional communication possibilities and digital communication refers to the hypermediality of the Internet. In contrast to traditional communication, the information that the recipient obtains via the Internet is available in hypermedial form, which means that the different communication media (text, sound, film) are structured in modular form (Straus and Frost 1999). By clicking on existing links that designate links between two Internet pages, new content constantly opens up for the user, which in turn contains new information. In contrast, traditional media such as television or radio usually only provide a linear presentation of the communication message. In the context of digital communication, the Internet users can predominantly decide for themselves which communication message they want to receive at which point in time. This form of marketing extends the traditional push approach and is referred to as online push marketing (Chaffey et al. 2019). In addition to hypermediality, there are further characteristics that allow a more precise specification and differentiation from classical communication. Particularly relevant in this connection are the so-called 6 Is of Internet marketing (Chaffey et al. 2019). The factors mentioned here especially cover the aspects relevant in Internet marketing practice. Besides these practical characteristics, strategic aspects play also an important role. Figure 14.23 illustrates these six characteristics (content based on Chaffey et al. 2019).

Strategic Factors

Application-Oriented Factors

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Individualization

• Segment- or customer-specific communication (e.g., recommender systems, email)

Intelligence

• The Internet enables convenient and cost-effective market research to adjust communication (e.g., online survey, weblogs)

Interactivity

• Electronic communication channels allow for mutual information exchange (e.g., user feedback)

Integration

• Digital communication can be integrated well into existing communication (e.g., online response to print advertisement)

Industry Restructuring

• Changed industry structures, for instance, through dis-/ intermediation open up new communication channels (e.g., advertisement on websites of intermediaries)

Independence

• Communication can be location- and time-independent (e.g., international live chat)

Fig. 14.23 Characteristics of digital communication. Source: Wirtz (2010b, 2020b)

The Internet offers a variety of ways for individualization in many areas of the marketing mix. In communication policy, this individualization is expressed by the possibility of adapting communication content almost arbitrarily to the respective customer needs. Here, a distinction must be made according to the degree of individualization. Communication can be segment- or micro-segment-specific as one-to-few communication. If the message is addressed to individual customers, this is referred to as one-to-one communication. The intelligence factor describes the possibility of conducting market research in a simple and efficient manner via the Internet. It thus forms the basis for targetoriented communication via digital channels. Only by knowing the preferences and online behavior of customers and customer segments companies can make the most of the advantages of digital communication. Digital market research provides the necessary customer information to implement modern forms of communication, such as recommender systems. Digital communication not only enables a direct, individual customer approach but also initiates an interactive dialogue between the sender and recipient of a message through feedback channels. This interactivity distinguishes online communication in a special way, because it makes many advantages available on a global level, which otherwise are only provided by personal communication (Laudon and Traver 2020). While traditional marketing communication almost exclusively uses push mechanisms that only allow one-way communication between the organization and customer, the Internet enables interactive marketing communication between the customer and the organization. Usually, the customer initiates the contact and requests information. This case describes a pull mechanism that can occur by searching for information on websites or by subscribing to a newsletter. In addition, the organization can also send out marketing messages to the customer, for instance, by means of social media posts, which refers to a push mechanism (see Fig. 14.24, content

Receive

Receive

Process

Customer React

Analyze/Process Act/React

Organization

Push

One-way Sender-ReceiverCommunication

Feedback

Two-way communication: From Sender to Receiver & from Receiver to Sender

Organization

Interactive Marketing Communication

Receive – Process – React

Customer

Receive – Analyze/ Process – Act/ React

Fig. 14.24 Comparison of traditional and interactive communication. Source: Wirtz (2013a, 2020b)

Response

One-way Sender-ReceiverCommunication

Classic Marketing Communication

Push/ Pull

Two-way communication: From Sender to Receiver & from Receiver to Sender

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based on Magronet Digital Marketing Blog 2013; Kreutzer 2017; Chaffey et al. 2019). Another special feature of online communication refers to its various possibilities for integration into an existing communication policy. The Internet can be combined well with other communication channels. In this connection, digital communication can be a complement in both communication directions. If communication from the organization to the customer takes place via traditional marketing communication, feedback can be provided via a digital channel. Alternatively, the organization can also provide a service hotline on its homepage for customer feedback. Moreover, the Internet can support communication, even if it takes place via traditional media. In so-called mixed-mode buying situations, for example, the customer can place an order over the telephone but obtain information about the products online. The Internet has led to a dynamic restructuring process in many industries, which can also have an impact on the company’s communication policy. Particularly intermediation and disintermediation have added or eliminated communication tools for companies. One example in this context is a supplier who now has the opportunity to sell and advertise his products via a digital procurement marketplace. In addition, the Internet has created a new and often more intense competitive situation in many industries. It is therefore important for many companies to adapt their communication policy to this competitive situation. Another feature of online communication is its local and temporal independence. The Internet enables global communication in real time, which gives companies opportunities to open up new markets. Based on modern information and communication technology, multimedia data can be made available anywhere and at any time without incurring any significant additional costs for the company. This ubiquity of communication is one of the main advantages of digital communication compared to conventional communication.

Communication via Digital Channels Digital business has changed communication in many ways. In addition to the fundamental changes presented here, digital business has also influenced the traditional process of communication. Knowing the changes at the individual stages of the communication process is a prerequisite for a holistic understanding of the structural framework of digital communication. The source and the recipient of a message have the same importance in digital communication as in traditional communication. Through the Internet, however, sending a marketing message has become much easier. Accordingly, the number of senders of marketing messages and particularly the number of messages themselves have increased. The source or recipient of a message can be both organizations and individuals, who can send technically encrypted messages via various input systems and media, as well as receive and decrypt them, respectively. Figure 14.25 illustrates the communication process in the context of digital communication.

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Feedback • Confirmation of receipt • Technical reaction / response Sender Human Interaction Layer

Organisation or individual that sends a message (customers, employees, companies, public institutions, etc.)

Delivery System Interface Layer

• Transmission information

Receiving device, which allows the input of the message (PC, service terminal, smartphone, tablet, smart watch, smart home devices)

Recipient

Organisation or individual that receives a message (customers, employees, companies, public institutions, etc.) Environmental Influences • Disturbances • Interfering with messages • Undermining of messages

Target Medium Displaying device, which allows the receiving of the message (PC, service terminal, smartphone, tablet, smart watch, smart home devices)

• Misunderstanding Encrypted Message Transmission Layer

• Distraction

• Translation of analogue information in transmittable data. • Encryption for secure transmission

Decoded Message • Decryption of received data Interpretation of transmitted information

Transmission

• Translation from transmittable code to analogue information

• Method of transmission of data • Technical standards / Protocols (html, email, SMS, ftp, etc.)

• Physical transmission (fiber glass, telephone line, satellite, etc.)

Fig. 14.25 Communication process in digital communication. Source: Wirtz (2013a, 2020b)

In contrast to traditional communication between humans, information in digital business requires three levels: the human interaction layer, the interface layer, and the transmission layer. Digital communication requires that humans deliver their messages through a digital device such as a mobile phone, a service terminal, or a smart home device. Even if the technical coding of a message is not new (e.g., conversion into analog radio signals), information in digital business receives important new properties through digitization. Particularly relevant in this connection are the modifiability and arbitrary reproducibility of digital information (Choi et al. 1997). An email, as long as it is not manipulated, cannot be overlaid on its way through the Internet, and, once written, it can be sent as often as desired. The arbitrary reproducibility in combination with the simple modifiability makes it possible to transmit information to a large number of recipients, but still to adapt it to the recipient in order to increase the chances of communication success. The transmission of the message is lossless and interference-free. A falsification of the message is therefore only possible at the point of decoding by the recipient.

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The most important transmission medium in digital communication is the Internet. It serves as a transmission medium for various information carriers, such as email, websites, and video. The transmission over the Internet takes place without media breaks, so that the information retains its digital form on the transmission path and the stability of the information is guaranteed. Negative environmental influences can lead to disturbances or overlaps in communication. The reasons for this are manifold and can be attributed to technical problems, competing messages, incorrect delivery times, or manipulation of the message. In this connection, security is particularly important in online communication. Due to the technological property of the Internet, online communication is particularly susceptible to manipulation by third parties, since a large part of communication takes place via unsecure channels. Although secure transmission channels are possible, they are insufficiently used in online communication. While the reaction of the recipient in traditional marketing communication can be measured, for example, by increasing sales or changing brand attitudes, digital communication channels offer numerous possibilities for measuring the recipient’s reaction. Click rates in banner advertising or reception measurements in digital messages such as emails or instant messages provide direct insights into the reception of the message. In addition, the recipient can actively transmit feedback to the sender of the message in digital business by means of instruments such as forums, email, live chats, or blog entries.

Communication Instruments The changed framework conditions in digital business face a variety of new communication instruments. The choice of a suitable instrument and the right means of communication is therefore the central action parameter of digital communication. The second most important component of the action framework of digital communication is digital branding, which will be addressed later on in this section. Communication is particularly dedicated to the media-bound messages of a sender to a corresponding recipient. Against this background, communication refers to the sum of all internal and external communication instruments of a company that can be used to achieve a certain objective. The instruments of communication and digital communication can be divided into advertising, sales promotion, public relations, sponsoring, event marketing, direct communication, and multimedia communication (Wirtz 2001a). Figure 14.26 shows the instruments of digital communication and lists selected potential applications.

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Instruments of Digital Communication

Advertising

• Banner

Sales Promotion

• Pop-ups

• Promotions

• Ad breaks

• Intranet

• Email

• Extranet • Alliances

Public Relations

Sponsoring

Event Marketing

• Publication • Site • Product of inforsponsoring placement mation • Sponsor• Digital • Email ships events

Direct Communication

Multimedia Communication

• Direct mailings

• Online catalogs

• Newsletters

• Interactive training

• Website customization

• Voice over IP • Digital communities • Chats

Fig. 14.26 Instruments of digital communication. Source: Wirtz (2001a, 2020b)

The economically most important instrument of digital communication is advertising. The most popular advertising media are email, banners, search engine optimization and advertising, as well as new window advertising, which includes pop-ups and interstitials. New forms of online advertising such as keyword advertising, advergaming, or floating ads constantly supplement these basic forms of online advertising. Due to their importance in digital business, the basic forms of online advertising are explained in more detail below. The forms of advertising integrated directly into the website include classic text links and various types of banner ads. Text links are text passages on a website that are stored with a hyperlink. They represent the simplest form of advertising on the content site. Banners are forms of advertising that are placed on a website and linked to the advertiser’s website via hyperlink. In the course of time, many different forms of banners have emerged which can be differentiated according to their size, their interaction and functional potential, or their multimediality (Laudon and Traver 2020). Traditional banners can be either static or animated. While static banners consist of only one single graphic, animated banners are composed of a series of single images, which result in a small animation in a given time interval. The only way to interact with a traditional banner is to access the advertiser’s website via the stored hyperlink. Even though the format of banners is often standardized, there are only few restrictions regarding the size of banners. The classic pop-up is a browser window that opens above the active content browser window and is usually smaller than the active window. The counterpart is the pop-under, which is displayed below the active window and is usually only noticed by the user after the active window has been closed. Shaped pop-ups have the same functionality as traditional pop-ups but

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are variable in their design, allowing greater creative freedom for the advertising window. If a new window ad is displayed regardless of the user’s usage behavior, this is referred to as an interstitial. This type of new window ad can be compared to the traditional interruption of advertising on TV. Usually, an interstitial is faded out again after a predefined period of time or after the advertising has expired. An extreme form of the interstitial is the superstitial. It is usually displayed in fullscreen format and contains numerous rich media elements. Finally, the use of email is also suitable for advertising, as this can be used both individually and as mass email. Compared to traditional letters, email is associated with reduced time and cost effort. Mass emails are usually sent aimlessly and are also referred to as junk mail or spam. Overall, digital business has created various new advertising opportunities for companies. Some of these forms of advertising are borrowed from traditional advertising, such as the static banner or the interstitial, while others could only be implemented through the Internet and its multimedia possibilities. In this context, rich media forms of advertising, advergaming, and context-sensitive search engine advertising are particularly relevant. The trend toward greater multimediality with regard to the forms of advertising is encouraged by the high availability of broadband connections. As a result, loading times for multimedia content no longer play a major role.

Targeting in Digital Communication The central starting point for successfully implementing advertising is (online) targeting. Online targeting refers to the use of digital and automated advertising measures tailored to specific target groups. The corresponding targeting process can generally be divided into five successive phases: scan/actual analysis, target/market definition, targeting instruments, implementation, and evaluation. Figure 14.27 shows the basic targeting process. • Situation Analysis • Capacity analysis •… Scan/ actual analysis

• Segmentation of results • Performance measurement •…

Evaluation

• Methodolical adaptation • Concerted implementation of the targeting measures •…

Implementation

Fig. 14.27 Targeting process. Source: Wirtz (2020b)

Target/ market definition

Targeting instruments

• Target market localization • Target market segmentation •…

• Definition of targeting framework/ measures • Determination of targeting methods •…

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The targeting process starts with a scan/actual analysis, in which the current situation of a company is analyzed and evaluated. In particular, a deviation evaluation between current and planned business and marketing goals is carried out. In this context, it is essential to detect significant weaknesses in current marketing activities with regard to the achievement of corporate goals and the capacities and resources available for marketing. In the next phase of target or market definition, the target market is localized and segmented. Based on the findings of the scan/actual analysis, relevant target markets are identified first. The overall market is then segmented into the desired target markets by means of certain criteria, also known as targeting variables. One can distinguish between six main types of targeting variables for segmentation: relationship to the company, demographics, psychographics and attitudes, value for the company, phase in the life cycle, and behavior (Chaffey et al. 2019; Meffert et al. 2019). The third phase of the targeting process deals with the determination and selection of adequate targeting instruments. Based on the localization and segmentation of the target market, the targeting framework and the associated targeting measures are defined, before deriving and specifying adequate targeting methods. The fourth phase refers to the implementation of the targeting by means of the previously defined targeting methods. Here, the business requirements and management specifications are technically implemented. This means that the technically relevant instruments for targeting as well as the processing, delivery, and display of the advertising media, in particular the ad server, are adapted or programmed according to the respective requirements. As soon as this technical and methodological adaptation is completed, a concerted implementation of the targeting measures can take place. In the final phase of the targeting process, the targeting measures are evaluated by means of the ad server. This facilitates a segmentation of results and a measurement of the performance of the targeting activities and the associated advertising media. If the targeting and related advertising objectives have not been achieved, digital retargeting can be initiated. In this case, users who were not reached with the first targeting attempt are marked and are found and addressed again in the retargeting process. The associated targeting instruments and advertising media can be modified beforehand to increase the chances of success of the retargeting activities. Retargeting starts again in the third process phase and can be repeated as many times as required until the desired target group has been successfully reached. Regarding the available targeting instruments, the increasing development of digital business has led to the development of more and more targeting methods that can be used to address a desired target group. A total of 16 different targeting methods can be distinguished. Figure 14.28 provides an overview of the multitude of different targeting methods in digital business.

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Geotargeting

Time Targeting

• Focused on the user of a specific, geographical region • Targeting is carried out, for instance, by evaluating the IP address •…

• Targeting based on a specific time of day or hour • For example, addressing users who are online at a defined time •…

Digital Marketing and Electronic Commerce

Technical Targeting • Targeting based on technical equipment • Orientation takes place, for instance, based on the operating system or web browser used •…

Social Media Targeting

Frequency Capping • Targeting related to the frequency of user contact • Limitation of ad display per user by means of settings in the ad servers •…

Keyword Targeting

• Combination of different approaches to reach target groups in social media • Targeting based on, for instance, geo and sociodemographic features •…

• Focused on the keywords within search engine queries • The user receives advertising content tailored to the terms of his search •…

Contextual Targeting

Content Targeting • Targeting based on keywords and content of a website

• Advertising approach based on the website content

• For example, the visitor of an automotive website is shown ads that are related to the topic and keywords •…

• For example, a visitor of a legal website does not receive fashion ads •…

Lifecycle Targeting

Targeting Methods

• Ad delivery is carried out, for example, in relation to the last order value •…

Profile Targeting

Relationship Targeting

• Targeting based on the current browsing behavior of the user • Orientation takes place, for instance, based on an analysis of anonymous user profiles •…

1

• Targeting based on socio-demographic characteristics

• Targeting based on the business relationship phase • Approach aims, for example, at addressing exclusively current or lost customers •…

Behavioral Targeting

Semantic Targeting • Targeting based on the overall meaning of the website and keywords • Ad delivery is exclusively based on previously defined contexts •…

• Targeting based on the position in the value- or behavior-related life cycle

• Users are addressed, for example, by segmenting age and gender groups •…

Predictive Behavioral Targeting • Targeting based on externally collected data in addition to browsing behavior • For example, externally collected survey and registration data enhance the overall understanding •…

Attitudinal Targeting

Retargeting

• Focused on the users' attitude towards risk and value understanding • Approach focuses on special groups, such as early adopters •…

• Aligned with the past web behavior of the user • The user is addressed at a later point in time by marking the user on a website in advance •…

Fig. 14.28 Targeting methods. Source: Wirtz (2020b)

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The targeting methods shown in Fig. 14.28 can be divided into six main categories: technical-based targeting, language-based targeting, sociodemographicbased targeting, attitude- and behavior-based targeting, enterprise-based targeting, and integrated targeting. Technical-based targeting addresses users based on technical parameters and includes geotargeting, time targeting, technical targeting, and frequency capping. Geotargeting is the process of targeting the delivery of advertisements to the user in a specific geographic region. This is done, for example, by evaluating the IP address that contains information about the user’s location. Time targeting directs the advertising to a specific time of day or hour. For example, only users who are online at a specified time are addressed. Technical targeting is an alignment of the advertising media based on the technical equipment. The orientation depends, for example, on the operating system or web browser used. Frequency capping is the last targeting method within the framework of technical targeting and describes an orientation related to the frequency with which users are addressed. This targeting method is characterized by a limitation of the ad display per user by means of settings in the ad servers. Language-based targeting is realized by means of linguistic aspects and includes the targeting methods keyword targeting, contextual targeting, and semantic targeting. Keyword targeting is aimed at the keywords of users in the context of search engine queries. The user receives advertising content that is tailored to the terms of his search. In contextual targeting, the delivery of an advertisement is based on previously defined keywords and the context of the website. The visitor of a website is only shown advertisements if the keywords defined in advance are contained in the text of the website and match its context. Semantic targeting represents an advancement of this targeting method. Here, the delivery of an advertisement is not based on individual keywords but on the overall semantic meaning of the website content and its fit to a previously defined topic. The user is thus shown a topic-specific advertisement when visiting a website and dealing with a certain topic. Sociodemographic-based targeting addresses users based on their sociodemographic characteristics and refers to the targeting method of profile targeting. For instance, the delivery of the advertisement is based on gender, education level, and age. The targeting of a user when visiting a website is usually based on a predefined sociodemographic user profile, which represents a combination of such characteristics. Attitudinal and behavioral targeting includes the following targeting methods: attitudinal targeting, behavioral targeting, predictive behavioral targeting, and retargeting. In the case of attitudinal targeting, the delivery of an advertisement is based on the user’s psychographic criteria, such as motives and attitudes. When

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visiting a website, the user is thus shown advertisements that match his or her personality and attitudes, for example, in connection with his or her price awareness or brand loyalty. Behavioral targeting is based on the user’s surfing behavior, which is identified and analyzed by means of web analytics. When visiting a website, the user only receives advertisements that match his or her interests derived from his or her surfing behavior. Predictive behavioral targeting is an advancement of this targeting method. Here, the delivery of an advertisement is based on a combination of the user’s surfing behavior and other additionally gained knowledge, such as user surveys or other data sources. Retargeting is the last attitude- and behavior-based targeting method and aligns the placement of advertising with the user’s past surfing behavior and related actions. Usually, the user has not completed an action desired by the advertiser and is therefore retargeted at a later point in time with the respective advertisement and motivated to carry out the action desired by the advertiser. Enterprise-based targeting addresses users in terms of company-related characteristics and includes the two targeting methods: relationship targeting and life cycle targeting. Relationship targeting refers to aligning the delivery of an advertisement with the business relationship of a user to the corresponding company. For example, the user is addressed with the aim of reaching potential customers, existing customers, or lost customers. Life cycle targeting is based on the position of a user in the value and behaviorrelated life cycle. For instance, the delivery of an advertisement is based on the user’s last order value or the time passed since registration. Integrated targeting is performed by means of a combination of different targeting methods and includes content targeting and social media targeting. Content targeting is a hybrid targeting method that consists of various language-based targeting methods. The delivery of the advertisement is therefore based on keywords as well as topics and content on a website. Social media targeting is a hybrid form as well. It is a combination of different approaches to reach specific target groups in social media, particularly including language-based, sociodemographic-based, as well as attitude- and behavior-based targeting methods. Overall, targeting is of great importance in the field of (online) advertising. The considerable technological advances in the field of big data analytics and artificial intelligence are opening up increasingly intelligent and differentiated targeting opportunities for companies. These targeting opportunities enable companies to address target groups more effectively and efficiently, thus making a significant contribution to their communication success in the context of advertising. Besides advertising, which is regarded as a central instrument of digital communication,

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there are other important instruments of digital communication in digital business, which are described below.

Digital Communication Instrument Influencer Marketing In the context of digital communication and social media activities, influencers have become particularly important in recent years. Companies integrate influencers (opinion leaders) in their brand and marketing communication. Influencers such as bloggers or vloggers (video bloggers) are regarded as trustworthy, influential, and wide-reaching multipliers in social media such as YouTube and Instagram. They present products and services of companies in a promotional way and describe them in their postings or videos. The remuneration for their advertising activities is usually based on their reach, for example, in the form of the number of subscribers and followers, or on their positive sales contribution measured in terms of linked sales revenues. Influencers are a familiar term to almost all Internet users. The term is increasingly associated with specifically created and paid advertising (Wavemaker 2019). Numerous companies already use influencer marketing or intend to do so in the future. This is also explained by the advantages commonly attributed to influencer marketing. Influencer marketing is considered to be more authentic than classical marketing. Already 70% of the young people trust a product recommendation of an influencer more than those of usual prominent advertising partners. Influencer marketing also improves communication with target groups and thus represents for 22% of the marketers the preferred and most economically priced method of acquiring new customers (digitalmarketinginstitute.com 2020). In addition, 67% of marketers use the high reach of influencers to spread their own content. Social media contribute significantly to consumers’ purchase decisions. Accordingly, 74% of consumers trust product reviews presented by influencers, and about 40% decide to buy as a result of influencer marketing (digitalmarketinginstitute.com 2020). Especially the young user group trusts the recommendations of influencers who are particularly convincing with their product knowledge and authenticity. Six out of ten young people follow an influencer rather than reacting to traditional marketing methods. In many cases, followers can benefit from a discount that is granted to them for their activity as followers of a particular influencer (digitalmarketinginstitute. com 2020). Figure 14.29 depicts the influencer-communication-follower (ICF) model that illustrates the basic communication structure between influencers and users by means of five levels.

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Influencer

Social Media Platforms

Multiplicators

Instagram

Feedback

Facebook

YouTube

Opinion Leaders

Influencer Personality

Influencer ContentPositioning

…

TikTok

First Multiplicator Level

First Users

Follow Users Feedback Multiplicators / Users

Second Multiplicator Level

Social Media (Blogs, Wikis, etc.)

Social Media (Blogs, Wikis, etc.)

Users

User-BasisLevel Feedback

…

…

…

…

…

…

…

Fig. 14.29 Influencer-communication-follower (ICF) model. Source: Wirtz (2020b)

On the first level are the influencers. They use various channels like YouTube, Instagram, or TikTok to reach their followers. A distinction is made between niche influencers, micro-influencers and macro-influencers. The former use several channels, but each of them has only a small reach. They address specific topics such as a particular sport or a special diet. A micro-influencer uses one or more channels and can reach up to 50,000 followers. Macro-influencers, by contrast, have more than 50,000 followers and usually deal with different topics on different channels (BVDW 2018). In this context, influencer content positioning is a decisive factor for the success of an influencer’s contribution. The influencer must provide a suitable social media platform with a correspondingly large number of followers in order to be considered for a marketing campaign of a company.

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At this point, the influencer generates a viral message that is as attractive as possible and tailored to the respective followers in order to achieve the greatest possible attention for the product or service presented. In doing so, the influencer emphasizes the positive characteristics for the target groups and underlines them with personal experience reports. In this way, an influencer builds an emotional relationship with his or her followers and can thus communicate the practical and advantageous contents of the product or service. Especially when selling physical goods and services while avoiding the costs of a physical presence, the targeted addressing of opinion leaders is an important aspect (Wirtz 2016b). The most important goal is to address opinion leaders in a targeted manner in order to trigger a multiplier effect. These opinion leaders or first users are known in forums or other social networks as experts in a specific field and thus well-recognized within a social community. They can be identified on the basis of an exceptionally high number of written contributions or evaluations. Opinion leaders or first users represent the first multiplier level by picking up, commenting on, or evaluating the contributions written by the influencers. Based on the first multiplier effect, various followers are made aware of the activities of opinion leaders and first users. These followers, in turn, take up their feedback and evaluations regarding a specific product or service and pass them on, sometimes with their own supplementary comments. Depending on the number of followers, this can lead to an independent, selfsustaining communication process that grows steadily and generates a high reach. In this context, social media not only enable product advertising but also influence target groups in the interests of the company and thus support the development or improvement of the company’s image. The user base is not necessarily represented directly by subscribers or followers of the influencers but is also addressed indirectly via created communication channels. Thus, there is both a direct and indirect way from the influencer to the users with regard to the product or service communication. The users can learn about products or services, for instance, via blogs, wikis, or any other channels. Due to the multiplier effect, this can lead to end customers encountering the same product several times in social media, even though the influencer has addressed it only once. The right positioning of influencer content in connection with the various multipliers can result in a successful and widespread marketing campaign. A successful integration of influencers is determined by several factors. In addition, the impact or success of an influencer’s contribution can be measured by performance measures. The personality content reach impact (PCRI) model in Fig. 14.30 describes these aspects of social media influencer marketing.

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Social Media Influencer Marketing

Influencer Personality

Influencer Content

Influencer Reach

Influencer Impact

• Trend- and user-oriented personality traits of the influencer (spirit of the time: "popular", "up to date") • Credible, trusting, inspiring and sympathetic personality aspects of the influencer: "leading lifestyle", “role & identification leader •…

• Attractive, entertaining and trendy influencer content that improves the personal user lifestyle image or creates community affiliation (valuable advice, recommendations). • Fit between influencer content, influencer personality and social media channel •…

• Follower/multiplier/like/link ability of the influencer and the influencer content • Influencer reach per social media channel with specific number of followers and total number of followers •…

• Impact success factors: likes, shares, clicks, pins and comments • Brand awareness, user growth, purchase intention and purchase conversion rate •…

Fig. 14.30 PCRI model of influencer marketing. Source: Wirtz (2020b)

The PCRI model has four levels. In the first level of influencer personality, important personality traits of the influencer are located. The influencer personality is of considerable importance for influencer marketing as a whole. This is due to the fact that the selected channels of influencers have to be accessed in a targeted manner in most cases and are not, as with the classic, linear television program, broadcasted on a regular and repeated basis. Trend and user-oriented personality traits are decisive criteria for followers to spread an influencer’s message.

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This also includes the credible, trustworthy, and sympathetic performance of the influencer, which is particularly important in connection with the principle of social trust. This refers to the high level of credibility that users grant other users with regard to the information and content they provide. Due to the usually very personal form of presentation regarding the experience with the selected product/service, influencers present themselves to their followers as “one of them” and thus benefit from the social trust principle. The influencer personality has a significant impact on the selection and marketing of influencer content. In addition, the influencer content influences the success of a posting. The content should be attractive and trendy according to the target group and be associated with the influencer. This implies that the influencer communicates his or her message on a suitable social media platform with the appropriate content in a credible and likeable way. The influencer content is especially relevant in terms of user identification and the improvement of the user lifestyle image. Influencers are particularly successful if their recommendations contribute to a perceived improvement in the user’s lifestyle. Moreover, it is crucial that there is an appropriate fit between influencer personality, influencer content, and the social media channel. This is particularly important for ensuring that the right target group is addressed with low scatter loss and high impact. Only the harmonious combination of influencer personality, influencer content, and influencer reach allows a successful digital campaign. The success of the campaign is usually measured in terms of likes, shares, clicks, pins, and comments regarding the products and services advertised by an influencer. In addition, the achieved brand awareness in the target group, the growth of the users in the target group, the purchase intention, and the final purchase conversion rate are of particular importance for the advertising companies. Finally, non-monetary variables such as likes, shares, and clicks must be converted into an effective and efficient purchase conversion rate for influencer marketing to be successful.

Further Instruments of Digital Communication The instrument of sales promotion is associated with various potential applications in digital communication. In the online area, price promotions can also be carried out and samples or promotional gifts can be sent online. One example is vouchers sent by companies to potential customers. Affiliate programs are also an effective way to promote sales. Affiliate programs use links to lead a website user directly to an affiliate’s website. If the user then executes a transaction, the affiliate will receive a percentage of this revenue (Rayport and Jaworski 2001). However, there is also the possibility of striking up further partnerships or alliances with other companies in order to promote sales. Companies can also use the new media as an additional information channel for public relations. In the context of digital business or digital communication, digital PR or online PR is therefore often also referred to in analog form. The basic aim is to achieve positive publicity for the company, its brands, products, and services and

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thus to use the network effects of the Internet to improve public perception. For example, it is possible to publish company news and annual reports on the company’s own and third-party websites. Many Internet portals offer companies the opportunity to act as exclusive partners or sponsors. This webpage sponsoring is becoming increasingly important. It serves the purpose of presenting the brand of the sponsor with the help of the content of the sponsored page, as well as to provide an added value to the Internet user. In this connection, the company can create an added value by making the content available more comprehensively or free of charge. In addition to sponsoring, event marketing is a similar instrument of digital communication. Event marketing refers to both the organization of digital events and product placement on the Internet. The Internet is often used to promote and follow up on offline events. However, the Internet itself also offers opportunities for digital events. These online events can be roundtables in chat rooms with personalities, experts, and users as well as artistic events or concert broadcasts (Christensen and Overdorf 2000). The use of the Internet also holds great potential for direct communication. Here, the desired contact to the consumer is greatly facilitated, as the target group can be reached relatively precisely. This can be done online by means of targeted direct emails, newsletters, or individually designed websites. The aim of these digital campaigns is to establish customer contact and increase customer loyalty. The basis of the successful application of online direct communication is a systematically organized and constantly updated marketing database system that contains data on customers, prospects, and consumer habits. On the one hand, the establishment and maintenance of a detailed database requires a lot of time and money, but on the other, it leads to a much higher marketing productivity in the company (Straus and Frost 1999). The importance of multimedia communication is mainly due to technological advances and innovations. As an instrument of digital communication, it primarily serves to transmit video sequences, texts, graphics, and sound elements via the Internet. This includes, for instance, online catalogs for physical products, interactive training courses, video conferences, transmission of speeches via the Internet, and Internet telephony. Digital communities represent a digital communication instrument that is not available in this form in the offline world. These communities can include discussion forums, chat rooms, or events such as digital trade fairs and exhibitions (Armstrong and Hagel 1996). Moreover, they serve as communication bases for Internet users with similar interests.

Digital Branding After having described the instruments of digital communication as central action parameter of digital communication, the following section addresses digital branding as the second most important component of the action framework of digital communication. In general, branding is about building brands and increasing brand value. The importance of the brand in digital business is significantly increasing. A study

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shows that the actual brand on average accounts for 30% of the total company value (Wirtz and Klein-Bölting 2007). Pursuing an active brand policy on the Internet supports the company in achieving their branding objectives. Communication via traditional mass media is a quick and effective means of brand building, but the new media increasingly limit its role. The Internet has become an equivalent alternative that companies can use in a more targeted and efficient way. The dynamics of the Internet pose great challenges for brand building, i.e., creating brand awareness and positioning the brand on the target market in order to generate customer loyalty. Against this background, digital branding seeks to integrate the special features of the Internet into the process of brand development, describing the development, expansion, and maintenance of brands on the basis of modern information and communication technologies (Wirtz 2016b).

Brand Management Strategies in Digital Branding Accordingly, the goal of digital branding is to increase the overall value of the company by increasing the brand value. The use of information and communication technology in general and Internet technology in particular can contribute to a lasting increase in brand value. The online brand development does not only refer to the development of the core product or the core service but extends it by additional services and communication with the market. In doing so, the brand serves to create consumer preferences and to differentiate the company from its competitors (Rayport and Jaworski 2001). Digital business has opened up various new opportunities for brand management, which are not only associated with great potential but also changed conditions for the company (Wirtz and Storm 2004). The central challenges of brand management in digital business are growing competitive intensity, increasing product and market complexity, constantly increasing digitization, and dynamic customer behavior. These framework conditions define the scope for action in brand policy as well as the achievable target spectrum. Besides the general conditions, the individual requirements of the company also play an important role when it comes to the selection of brand management strategies. With regard to the initial situation specific to the company or alliance, three basic scenarios can be distinguished which shape the strategic thrust. In this context, one can distinguish between the absence of a trademark, the existence of an established trademark, and the existence of several trademarks of economically independent businesses. Figure 14.31 shows the relevant basic conditions as well as starting situations and explains the central brand management strategies in digital business (content based on Wirtz and Storm 2004).

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Frame of Reference for Branding Strategies in Digital Business Basic Conditions

Initial Situation

Type of Strategy

No existing brand A

Online strategy for new brands

Increasing complexity

Increasing digitization

Increased competition

Dynamic customer behavior

Existence of various independent brands

Existing brand in the offline world

B

C

Offline/online brand adaptation strategy

Offline/online transfer of regular brand

D

Online brand alliance

Characteristics

• Distinct, independent digital businessspecific brand

• Adaptation/ combination of existing elements of traditional offline brand • Supplementation by new Internet-affine components

• Complete transfer of traditional offline brand to the Internet

• New brand emerging from brand alliance • Partial transfer of regular brand of cooperating brands

Examples

• eBay • Spotify • Airbnb

• Nationwide • Greyhound • New York Times

• Washington Post • Walmart

• Verizon

Fig. 14.31 Central brand management strategies in digital business. Source: Wirtz (2020b)

Companies whose business model exclusively rests on digital business do not have an existing brand from the offline world and therefore have to build a new brand and position it accordingly (option A: online strategy for new brands). The strategy of positioning a new brand is similar to this, if traditional, i.e., non-Internetbased, business areas are to be expanded to include digital business and are independently marked. The basic areas of activity of brand building must be redesigned in the context of digital business. In particular, the dominant characteristics of the Internet such as networking, interactivity, and ubiquitous availability affect the design possibilities of brand building. In addition to the World Wide Web as an instrument for marking the product, the integration of the Internet as a personalized communication and interaction platform

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enables a high degree of customer loyalty and an increase in relationship intensity despite the virtuality of products and organizations. Given the developments in digital business, traditional cycles of build-up and decline, relaunch, and re-emergence are taking place far too slowly. This requirement is met by the new brand strategy through a high degree of positioning flexibility and the rapid penetration of clear brand communication via the Internet. Regardless of a brand-relevant history, a brand world can be built up that exclusively conveys digital business-specific content without having to make compromises. However, this advantage is only achieved with the help of a comparatively high budget requirement for the design, positioning, and penetration of the brand. An alternative brand management strategy for an already established brand is the offline/online brand adaptation strategy (option B) in which an established brand is supplemented by Internet-specific elements. Companies can realize this supplement in terms of their brand design (e.g., logo or name) and brand positioning with a corresponding expansion of the brand personality. The partial transfer of core contents and values of the brand already established in the market enables a company to build up the adapted brand with comparatively low investment costs. However, there is a risk that the scope for shaping the brand policy of the digital business specific brand is greatly restricted by the dominance of traditional components or that negative effects lead to disadvantages with regard to differentiation or brand personality. A third strategic option is the offline/online transfer of a regular brand (option C), which enables a complete transfer of an existing brand into the digital businessspecific business area. Mail order companies such as Sears that pursue this strategy thus convey the holistic integration of digital business as an alternative equivalent to traditional mail order or sales channels. The range of activities of this strategic option is defined by the complete takeover of the traditional brand and can only be expanded to a limited extent. In the context of digital business, this means that companies must combine their potentially traditional brand core with modern, dynamic content. The brand attributes transferred from the core brand must be relevant for the digital business-based business areas or must not convey any contrary content. If this is not the case, there is a risk of brand dilution and erosion for the established brand. By means of this strategy, companies can open up new strategic business areas with a minimum market entry budget. The cost savings in brand design are particularly noteworthy in this context. A complementary strategy is the online brand alliance (option D), in which several independent companies position a common new brand based on their established brands. This hybrid form of options A and C provides for the systematic marking of a joint service by at least two brands, which must continue to be perceived separately by third parties. Moreover, this strategy seeks to establish and position a new brand that is associated with the cooperation brands and charged with related core attributes. In this context, advantages of additional sales potentials for the cooperation partners as well as the mutual transfer of positive characteristics face the risks of the missing identity fit between the brands and the loss of exclusivity. Due to the already established brands, companies can quickly build trust among consumers with low resource expenditure. While a positioning can occur quickly, maintaining a sound brand alliance and a purely online-based new brand strategy is associated with

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increased coordination effort. Here, there is a particular focus on ensuring flexibility and controlling cross-effects.

14.3

Online/Offline Multichannel Marketing

As part of the dissemination and commercial use of modern information and communication technologies and the Internet, online-based channels have emerged, creating various new possibilities of digital service delivery. These stationary or mobile Internet-based interaction channels have become a vital factor for customer relationship management (Wirtz et al. 2003a). In e-commerce, for instance, the Internet and related forms of distribution represent up-to-date distribution channels that are used in numerous ways to either replace or complement traditional distribution channels.2 The particular importance of combining online and offline channels stems from the additional benefits of Internet-based service offers and the specific cost structure of the Internet. Online banking is a textbook example of multichannel e-commerce service delivery. Today, clients can use several channels to carry out their banking transactions (e.g., via counter, telephone, mail, or Internet). The increasing shift of activities from traditional face-to-face counter interactions to automated modern online transactions brings along tangible benefits for the banking institutions (Al-Mudimigh 2007; Safeena and Date 2010). If all factors remain constant, an increase in online banking activities reduces offline banking activities because customer traffic relocates to automated online service provision. Accordingly, banks could downsize their expensive branch network and significantly reduce the costs by 70–90% in the service delivery of online banking. In addition to the efficiency and monetary benefits that multichannel digital business service delivery offers to providers, there are also various advantages for customers, such as 24/7 availability and an overall improved customer service (Wirtz and Daiser 2015). Multichannel digital business management consists of a strategic and an operative component that both aim at harmonizing the different user preferences with the constraints of the channels used. Normally, channel structures and the underlying technology follow path dependencies that are not designed for interdependence with other channels (Wilson and Daniel 2007). Moreover, it is often neglected whether the channels actually have been proven to be particularly useful or if their complementary use provides additional value (Ebbers et al. 2008).

Service-Channel Diversification Model From a strategic digital business perspective, companies have the choice to expand their services through new channels or broaden existing channels. Following Ansoff’s approach for strategic diversification—the original Ansoff matrix (1957)

2

See for the following chapter also Wirtz (2008) and Wirtz and Daiser (2015).

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Online/Offline Multichannel Marketing

559

showed product-market strategies for business growth alternatives differentiating between existing and new markets and existing and new products—the servicechannel diversification model helps to explain whether and how companies should expand service delivery (see Fig. 14.32). Channel widening/expansion Same

Same Similar New

Service expansion/channel deepening

I

Single-channel service penetration

Similar

New

III

Lateral-channel service penetration

• Application of one or similar services through one or similar channels

• Application of one or similar services through different channels

• Example: mail.com offering email service based on desktop browser

• Example: mail.com offering email service based on desktop browser, mobile browser, and mobile app

II

Single-channel service diversification

IV

Multilateral cross-service channel expansion

• Application of different services through one or similar channels

• Application of various services through multiple channels

• Example: mail.com offering email, news, weather, etc. based on desktop browser

• Example: mail.com offering email, news, weather, etc. based on desktop browser, mobile browser and mobile app

Fig. 14.32 Service-channel diversification model (SCD model). Source: Wirtz (2006, 2020c)

The SCD model is based on the two perspectives of channel widening/expansion and service expansion/channel deepening. This leads to a fourfold table providing the following four generic strategies: (1) single-channel service penetration, (2) single-channel service diversification, (3) lateral-channel service penetration, and (4) multilateral cross-service channel expansion. Single-channel service penetration focuses on a particular service within a particular channel. This can be an effective strategy for digital business services that are already successfully provided to users. However, this one-channel strategy may also aim at further improving the specific service within the existing channel and thus tailoring it even better to the needs and requirements of the customers. This digital service development refers to the strategy of single-channel service diversification. Lateral-channel service penetration strategy refers to taking an existing service but offering it through various channels. In the case of a multilateral cross-service channel expansion strategy, a company provides a new digital service to the users via new channels. Although one could think that a maximum strategy (using as many channels and services as possible) may be the best way of proceeding, this does not necessarily

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lead to better user orientation or to more effective service provision. Here, a proper multichannel digital business management that suits the particular requirements is the better solution. Before going further into the subject of digital business multichannel strategy, we will have a look at the channel characteristics of digital service delivery. According to the multichannel model of Wirtz (2001c, 2002, 2006), service provision and customer relationship management can take place via several channels in a digital business context. Figure 14.33 provides an overview of relevant online and offline channels as well as the associated customer touchpoints (content based on Wirtz 2001c).

Digital Service Provision & Customer Relationship Management through

Information Points

TransactionPoints

9. Broadcasting (Radio, TV)

8. Telefax

7. Telephone

6. Mobile Media/Apps

5. Social Media

4. Messenger/Chat

3. Other Websites

2. Own Website

1. Email

6. Customers-to-Customers

Online Channels

5. Fairs and Conferences

4. Sales Representatives

3. Newspaper, Magazins (Print)

2. Postal Mail

1. Shops/Show Rooms/Service Desks

Offline Channels

Service Points

Customer Touch Points Consumers

Reference Points

Non-Profit Institutions

Reference Points

Companies

Reference Points

Fig. 14.33 Channel characteristics of digital delivery. Source: Wirtz (2016a)

In the first step, the relevant digital service channels are categorized and distinguished between online and offline-based service provision. At first glance, it may seem unusual that telephone and telefax services are listed in the online service category since these were established long before the rise of the Internet. However, telephone and telefax were switched from analog to digital IP-based technology and thus belong to the category online channels.

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Online/Offline Multichannel Marketing

561

A channel provides value to a digital business if it is useful, effective, and efficient. Personal service provision via shops, showrooms, and service desks, for instance, allows immediate personalized interaction. This generally enables companies to interact very closely with customers. However, this form of communication also carries significant inefficiencies: regularly providing repetitive or similar information to individual visitors, including media disruptions, high maintenance costs, etc. On the one hand, online channels generally support service provision with lower transaction costs than offline channels, especially when taking into account automated online communication channels. On the other hand, automated service provision is limited with regard to communication interaction. The customer touchpoints, which function as customer interfaces, present the connection between the offline and online service channels and digital business customers. Similar to the different service channels, customer touchpoints vary in their communication and service provision capacities. In this connection, Wirtz (2006) identified the following constellations: information points, service points, and transaction points. Information points represent the interface with the lowest level of customerprovider interaction since these enable simple communication only. Examples are static websites that only present information to the reader, information material about the company, its products, as well as its terms and conditions. Transaction points represent the most comprehensive interface between customers and companies. At these touchpoints, customers can handle matters, such as defining customized products, payments, etc. Service points are customer touchpoints that allow interaction between the customers and the service provider. At the service points, customers can receive different services such as consultation or after-sales services via telephone, email, and messenger/chat service channels. In addition to the service channels and customer touchpoints established and used by companies, all customers are also influenced by effects that are much more difficult to control. These impacts, which are, for example, caused by word-ofmouth and review information, come from so-called reference points that companies cannot directly control (Reichheld 2003; Wirtz 2013c). All customers possess certain reference points that are beyond a company’s direct control but influence their opinion about particular topics. For this reason, companies should try to follow information flows of reference points to respond appropriately in case these become conducive and constraining forces.

Digital Business Multichannel Strategy Framework Apart from analyzing the strengths and weaknesses of particular channels, it is also crucial to define an appropriate strategy to implement a multichannel management system. Designing and implementing an efficient multichannel management demands a strategic and target-oriented approach. Figure 14.34 outlines different strategies for approaching a suitable digital business multichannel offering.

• No competition between channels

• Channel competition

• Comprehensive channel management

• High centralization

• High coordination

• High interdependence

• Centralized overall channel management

• Multichannel structure

• Interdependent channel structure

• Loosely linked channel structure

• Mostly lead channel structure

• Completely coordinated channels/comprehensive channel management

Integrated Channel Strategy

• Partially coordinated channels/channel-inherent management

Combined Channel Strategy

Fig. 14.34 Digital business multichannel strategy framework. Source: Wirtz (2012b, 2020c)

• High decentralization

• Low coordination

• High individual responsibility

• Channel-specific management

• Lead channel structure

• Channel competition

• Closed channel structure

• Uncoordinated channels/ channel-inherent management

Isolated Channel Strategy

14

Organization

Formation

Coordination

Aspects

Approach

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Online/Offline Multichannel Marketing

563

The framework breaks down multichannel management into three different strategies: isolated channel strategy, combined channel strategy, and integrated channel strategy. An isolated channel strategy refers to the situation that the individual channels of the multichannel system run independently and are not linked to each other. This means the individual channels compete with one another since users have to decide which channel to use and stick to their decision. This structure often is the outcome of an evolutionary multichannel management that adds additional channels over time. In this respect, usually one channel serves as a key channel, and the other channels (e.g., postal mail, mobile apps, etc.) run as a kind of add-on service provision. Summing up, an isolated channel strategy places high responsibility on the individual channels and is characterized by a generally decentralized structure. The combined channel strategy also follows the approach of having a lead channel but differs from the isolated channel strategy through the symbiotic use of additional channels that complement the lead channel. Instead of pursuing individual stand-alone channels, the combined channel strategy requires a comprehensive multichannel approach. This way, the advantages of different channels can be combined into the overall service provision. Moreover, a target-oriented, valuecreating application of various channels leads to cost and convenience benefits for the user and the provider. The integrated channel strategy aims at providing services through interconnected and interchangeable service channels. This means that customers can conduct procedures in person or remotely and switch to another service channel during the process. For instance, a customer begins a service online from a stationary personal computer, continues the service processing by handing in particular transfer files that he or she does not want to transmit via mail or Internet at the shop, and follows the status of the procedure on a mobile device, such as a tablet or mobile phone. In this setting, the channels are interdependent, their management demands high coordination efforts, and the multichannel system has a centralized structure. This is required since the service provider needs to plan, coordinate, and control the entire multichannel service portfolio. This approach allows to tailor the service offer specifically to the needs and preferences of particular user groups and to reasonably combine them to achieve value-adding synergies. From a business perspective, the three strategies demand a different handling. While the isolated channel strategy usually requires less coordination effort from a central management view, the integrated channel strategy follows a centralized approach that needs a key responsible person or department that coordinates the service provision. The combined channel strategy lies in between the other strategies. Thus, it is a management process of give and take between central, staff, and decentral departments. It can be stated that a rising service integration level increases central coordination effort. Besides coordination and strategy aspects, companies need to

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consider the design and implementation of a multichannel management system. It demands a coordinated approach that involves all internal stakeholders of the company. For this reason, a systematic proceeding is recommended, which is explained in the following section.

Design Multichannel Strategy and System The process of designing the multichannel system consists of four consecutive steps that illustrate the entire progress of an ideal development of multichannel strategies and systems.3 These four steps comprise the analysis of the initial strategic situation, a market segmentation, the strategic definition of the multichannel management strategy, and the design of the multichannel management system. Strategic decision-making is long-term oriented. The planning process for developing strategy starts with an analysis of the initial strategic situation. Thus, the first step needs to involve an analysis of the external and internal influences, as well as the strengths, weaknesses, opportunities, and threats of the multichannel endeavor. The overall aim of this step is to get a transparent view on the specific user and market needs as well as respective requirements. Furthermore, the internal analysis, which focuses on the company’s competencies and resources, should deliver the organization’s status concerning personnel and technical readiness for approaching the respective channel strategies. Based on the results of these analyses, the market segmentation step divides the market into particular target groups. These target groups have to be determined in a way that allows to develop a successful and target group-oriented market. For this purpose, geographic, sociodemographic, behavioristic, psychographic, and customer-oriented approaches of market segmentation are frequently applied. The third step of multichannel strategy and system design is the strategic definition of the multichannel management strategy. In this part of the process, the responsible decision-makers determine the thrust of the multichannel system. Thus, the definitions of the market development strategy and the customer-oriented strategy are key parts of this step. The final step, design of the multichannel management system, can be broken down into four substeps: potential channels and user-oriented strategy, multichannel management layout, selection of multichannel system channels, and selection of channel participants. Figure 14.35 shows the schematic overall flow of the strategic multichannel management process.

3

See for the following chapter also Wirtz (2013c).

14.3

Online/Offline Multichannel Marketing

565

1 SWOT analysis Analysis of external influences

Geographic market segmentation

Analysis of internal influences

Customer-oriented market segmentation

Socio-demographic market segmentation

Analysis of initial strategic situation

Psychographic market segmentation

2

Market segmentation

Behavioristic market segmentation

Definition of market development strategy

3

Definition of customer-oriented strategies

Strategic definition of multichannel management strategy

4

Potential channels and user-oriented strategy

Multichannel management design

• Determination of • Identification of target group-specific channel layers channels • Determination of positioning • Identification of intermediary • Determination of channels differentiation level • Adaptation, circumvention, conflict, and cooperation strategies

Selection of multichannel system channels

• Criteria for channel selection

Selection of channel participants • Channel segmentation

• Cooperation strategy • Qualitative and quantitative methods concerning intermediary for channel selection channels • Selection decision

Design of the multichannel management system

and consideration of adaptation needs

Fig. 14.35 Strategic multichannel management process. Source: Wirtz (2013c, 2020c)

Potential channels and customer-oriented strategy cover activities that are associated with identifying group-specific channels and intermediary channels, as well as with defining the adaptation, circumvention, conflict, and cooperation strategies. In the context of digital business multichannel management, intermediary channels summarize the channels operated by third parties but used within the digital business service provision (e.g., Facebook, Twitter, TV channels, review platforms, etc.). The substep of multichannel management layout refers to the activities that define the number of channel layers, the positioning of the system, and the level of differentiation that the channels shall possess. The number of channel layers determines the number of distribution steps that are necessary from service initiation to service completion. The positioning of the system brings in the marketing

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perspective by dealing with positioning activities necessary to attract attention. Concerning the variety of the channels, the level of differentiation determines the distinctiveness of the digital services. Selecting multichannel system channels begins with defining appropriate channel selection criteria. The following selection process should be supported by using qualitative and quantitative methods that allow a holistic and rather objective picture in order to compare the different channel solutions. Based on the results of the selection analysis, companies need to make a selection decision that should already take into account the management of potential changes. Having defined the multichannel approach and associated channels, companies have to define the desired structure of the multichannel system with regard to their own and intermediary provision of service channels. This means that the channels follow a clear segmentation approach that allocates them to the respective process participants and thus determines who operates and takes responsibility for the channel. This is especially important for service offers that are provided by intermediary channels, since the technical handling is not made in-house. When looking at the technological development of modern information and communication technologies as well as the associated innovations in digital business services, mobile technology and social media have significantly expanded the possibilities of multichannel management. Since the distribution channels usually lead directly from the provider to the customer, their relationship is also highly important in the context of multichannel management and digital marketing. The concept of customer relationship management (CRM) focuses on the relationship between these two actors and addresses relevant aspects in a differentiated manner. The following chapter therefore outlines strategies to use the various channels to establish a useful customer relationship.

14.4

CRM in Digital Marketing

Customer relationship management has become an important topic over the past decades.4 Especially its relevance for systematically fostering customer loyalty is a vital factor for enhancing business success (Anderson and Srinivasan 2003). The connection of relationship management and customer loyalty is supported by Kotler (1994, p. 48), who states that “the task of creating strong customer loyalty is called relationship marketing.” Since customer loyalty has diverse positive effects on quantitative and qualitative corporate objectives, the general importance of successful relationship management becomes clear (Xue and Harker 2002). This connection formed the basis for the advancement of a target-oriented, systematic relationship management. The rise of modern information and communication technologies at the end of the 1990s has complemented this development. While the resulting potential for managing customer relations was overhyped in the beginning, especially during the

4

See for the following chapter also Wirtz (2013a).

14.4

CRM in Digital Marketing

567

Internet bubble, its chances and risks are seen more realistically today (Gay et al. 2007). Modern information and communication technologies allow to manage customer relations more effectively and efficiently than ever before (Kim 2012). Despite the Internet’s mass media nature, its inherent possibilities for interaction allow efficient one-to-one or one-to-many communication. Apart from that, the strategic use of network effects, the cost structure advantages of information services, and the personalization of websites or services foster customer loyalty (Bird 2007).

Definition of Digital Customer Relationship Management The massive increase in transparency with regard to information, services, and product offers lowers change barriers that can decrease customer loyalty. Although the concepts of relationship management and customer loyalty bare risks, their important role for organizational success is now generally accepted. However, since the topic looks back to continuous advancements, there are still differences with regard to the understanding of relationship marketing, which is often used interchangeably with relationship management (Parvatiyar and Sheth 2001; Payne and Frow 2005). Against this background, the following section presents several definitions from the scientific literature: • “Relationship marketing combines elements of general advertising, sales promotion, public relations and direct marketing to create more effective and more efficient ways of reaching customers. It centers on developing a continuous relationship with customers across a family of related products and services” (Copulsky and Wolf 1990, p. 16). • “Relationship marketing refers to all marketing activities directed toward establishing, developing and maintaining successful relational exchanges” (Morgan and Hunt 1994, p. 22). • “Relationship marketing attempts to involve and integrate customers, suppliers and other infrastructural partners into a firm’s developmental and marketing activities” (Sheth and Parvatiyar 1995, p. 399). • “Customer relationship management strategy, enabled by processes and technologies, is designed to manage customer relationships as a means for extracting the greatest value from customers over the lifetime of the relationship. These strategies typically concentrate on the operational responses required to manage the customer” (Heller Baird and Parasnis 2011, p. 30). While early definitions focus on establishing a continuous relationship and successful relational exchanges, the last definition moves on to a management perspective that puts value creation into the center of attention. Value creation is supposed to be achieved through process and technology-enabled activities that are performed in response to the needs and requirements of the customers. Transferred to the digital business context, we therefore derive the following definition.

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Definition of Digital Business-Related Customer Relationship Management (Wirtz 2003, 2020a) Digital business customer relationship management includes the analysis, planning, steering, and controlling of customer relationships based on information and communication technology, with the aim to successfully generate value for the customer and the respective company.

Customer Loyalty Dimensions in Digital CRM Customer relationship management in digital business especially contains four essential target dimensions: sustainable customer loyalty, usage frequency, length of stay, and revenues of customer loyalty. In this connection, sustainable customer loyalty represents the core target dimension, as it always needs to be considered when taking customer relationship actions. The second target dimension refers to the usage frequency of a digital business offer within a certain period of time. Thus, the more often a customer uses a particular service, the higher the usage frequency. This target dimension comprises an absolute and a relative perspective. The number of page impressions per customer determines the absolute perspective. The relative perspective takes this number and builds a ratio by relating the absolute perspective to the overall customer page impressions in similar service offerings, thus showing the ratio between the purchases or visits regarding a digital business offer of one provider and those of other providers with a similar service offering. The third target dimension covers all actions carried out by the provider to maximize the length of stay on the respective website. The intention is to enhance service usage by increasing the time a user stays on the website or digital application. In e-commerce, the technical term for the potential that a user stays on a website is called stickiness. Thus, a sticky website increases the likelihood that users will stay longer and will use more services on this website than on others that are not or less sticky. This is particularly important in order to reduce the rush at the expensive physical counters by shifting transactions from the personal offline to the automated online environment. The fourth target dimension refers to sales and revenue-related positions. Based on the usage frequency and/or length of stay, companies may generate revenues through their loyal customers involving usage-/stay-related revenues, advertising revenues, and sale transactions. The higher the usage frequency within a certain time and the higher the page impressions generated by users, as well as the longer the stay for website visits, the higher are the related revenues. The four target dimensions, however, are neither substitutes for each other nor competing elements. Thus, customer loyalty actions may aim at individual target dimensions or at any combination of them. Many initiatives of customer relationship management, for instance, pursue all four of them. Figure 14.36 provides an overview of the four target dimensions of customer/user loyalty.

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CRM in Digital Marketing

569

Sustainable customer loyalty Lasting customer loyalty as a basis for all customer loyalty-related targets

Usage frequency

Length of stay

• Usage frequency of an digital business offer within a certain period of time • Absolute perspective: number of user page impressions

• Maximizing the length of stay per website/application usage • Stickiness: technical term for increasing the length of stay for website visits

• Relative perspective: number of user page impressions in relation to the overall user page impressions in similar service offerings

Revenues of customer loyalty • Revenues of usage/stay • Advertising revenues of usage/stay • Sale transactions

Fig. 14.36 Target dimensions of customer/user loyalty. Source: Wirtz (2003, 2020a)

Customer Relationship Process in Digital CRM Establishing a successful customer relationship is usually a complex process. The goal of digital business-related customer relationship management is to maintain customer relations to induce those customers that have already used a service, to use this service again, or to use another service of the service offering. This management process consists of a sequence of phases: awareness, consideration, usage, reconsideration, dissatisfaction, and recovery. Following the management principle set by Peter F. Drucker, “If you can’t measure it, you can’t manage it” (Quidgest 2017), appropriate performance indicators that support impartial measurement of the success of the particular activities should accompany the planning and steering of these individual phases. Figure 14.37 outlines these phases and selected performance indicators.

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• Conversion rate of customers to regular customers

• Churn rate

• Traffic loss through customer churn

• Loss rate of regular customers • Marginal return of regular customer

• ...

•…

Dissatisfaction

Usage

4b 4b

• Recovery rate • Recovery costs

4a

4c

• ...

11

22 Awareness

33 Consideration

• Number of page impressions

• Conversion rate of visitors to customers

• Monitoring demanded service types

• Growth rate of application users or visitor base of website

• Acquisition cost for a new customer/user

• Usage frequency of services

• Usage frequency

• Acquisition cost for a unique customer/user

• ...

• Complaints/ satisfaction with services

• ...

• ...

Fig. 14.37 Digital business customer relationship management process. Source: Wirtz (2003, 2020a)

The initial key tasks of the awareness phase are to identify the general demand for digital business services, potential customer groups, as well as the needs and requirements of the individual customer. Based on this information, the digital business information and service offering have to be marketed and popularized among the potential customer groups. The overall target is that the customer recognizes the availability of the service offering that suits his or her needs. Based on this created awareness, an initial customer contact is established via information and communication technologies (e.g., visiting the website). Typical performance indicators of the awareness phase are the number of page impressions, the growth rate of the visitor base, and the acquisition cost for a unique visitor.

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CRM in Digital Marketing

571

In the next phase of consideration, the potential customer is confronted with the service offers that are tailored to the expected customer needs. This requires profound knowledge of the target group demand, as well as the individual needs and preferences of the potential customer. The core activities in the consideration phase are to identify interested customers and to create preference by underscoring the benefits and the superior characteristics of the service offers provided. To measure the success of the consideration phase, the conversion rate of visitors to customers, the acquisition cost for a new customer, and the absolute and relative customer frequencies are helpful performance indicators. The overall target of the usage phase is to create customer satisfaction by providing information or services. For this purpose, the provided information and services need to be easy to use and useful to the customers. Companies at least have to meet or better even surpass the expectations of the customers. If customers are satisfied with the service handling and the outcome of the online interaction, the likelihood for reusing the service offering increases. Therefore, companies need to design and provide their services in a way that satisfies the needs of the customers. Furthermore, this point of interaction should be used to examine the level of user satisfaction by means of customer feedback, complaint, and controlling systems that support constant monitoring and evolution of the services provided. This is particularly important since a dissatisfied customer may not use the service again, may discourage others from using the service, or may even leave the entire platform. Common performance indicators of the usage phase are the monitoring of the types of service demanded, the usage frequency of services used, as well as user feedback in terms of complaints and satisfaction with regard to the services provided. The reconsideration phase aims to turn first users into loyal regular customers. Key activities to achieve this aim are to maintain and intensify customer preference, inform customers about new services and optimizations, as well as provide easy access and useful content for repeated use of the information and services provided. The conversion rate of users to regular customers and the churn rate of regular customers are typical performance indicators in the reconsideration phase. If customers are not convinced of the services provision and enter the dissatisfaction phase, companies have to initiate actions to prevent upcoming user churn. First, they have to analyze the reasons for the lack of satisfaction among customers and thus the rationale for potential user churn. Here, customer surveys and focus groups are helpful tools to identify performance discrepancies. At the same time, companies should improve and extend their complaint management to gather additional information on potential hazards. Second, they have to solve the issues and performance gaps identified. Important performance metrics of the dissatisfaction phase are the churn rate and the traffic loss through user churn.

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In the next step, the process of customer relationship management reaches the recovery phase. Here, companies should approach dissatisfied customers with the objective of regaining customer confidence and making the digital business service offering attractive again. Key activities of this stage are selecting recovery target groups, presenting optimized performance outcomes and benefits, as well as illustrating recovery incentives to the customer. The recovery rate and the customer recovery costs are common performance indicators to measure the success of the activities in the recovery phase. In order to ensure a capable digital CRM through all phases of the process, digital business companies have to meet the tasks and challenges that occur in the individual phases. Therefore, the management process is supported and performed by various digital CRM instruments that can be applied from the contact process through acquisition, purchase and usage process to reacquisition, customer churn, and recovery process (Khan and Khawaja 2013). The next section outlines and describes the respective digital CRM instruments for each phase of the management process.

Instruments of Digital CRM Based on the digital business customer relationship management process, companies of the Internet economy have various digital CRM instruments available to perform the steps that are necessary to reach the objectives for an efficient relationship toward potential and existing customers (Ahmed et al. 2015). In each phase of the abovedescribed process, digital business companies faced complex tasks and challenges in the context of their customer relationship management that they can accomplish by means of powerful tools and instruments (Fragouli and Noutrixa 2014). Figure 14.38 presents the tasks and challenges of the different process phases and respectively summarizes the digital CRM measures and instruments. The most significant digital CRM tool is data mining since its methods can be employed in mostly all phases of the customer relationship process. The term data mining process subsumes methods that enable to analyze large datasets and generate valuable information thereof (Gupta 2014).

• Recognizing interested users/ consumers

• Preparing a quotation

• Presenting product advantages

• Integrated supply chain

• Digital offer • Direct distribution (disintermediation)

• Virtual communities/ social media websites

• Email information

• Big data analysis/data mining/cloud services

• Email information

• Online forms for data collection

• Big data analysis/ data mining/ cloud services

• Digital product provision (e.g. software)

• Virtual communities/ social media websites

• Digital customer forum

• Service website

• Generating satisfaction

• Service performance

• Avoiding cognitive dissonance

Usage process Consumption

• Digital test markets

• Virtual Communities/ social media websites

• Digital customer forum

• Web forms • Digital offers

• Customer history analysis/ thorough data base

• Improvement of performance gaps

• Optimizing complaint management

• Analysis of customer churn

• Avoiding customer churn

Customer churn process Dissatisfaction

• Big data analysis/data mining/cloud services

• Product provision

• Recognizing time of purchase

• Information on product improvements

• Getting insight to preferences

Reacquisition process Reconsideration

• Virtual communities/soc ial media websites

• Digital incentive system

• Service website

• Digital customer forum

• Digital customer dialog

• Big data analysis/ data mining/cloud services

• Allowing recovery incentives (discount, warranty)

• Targeted/persona lized service optimization

• Restoring customer trust

• Selecting customer recovery targets

Recovery process Reconsideration

CRM in Digital Marketing

Fig. 14.38 Measures and instruments of digital CRM. Source: Wirtz (2003, 2020a)

• Sponsorship discussion forums

• Virtual communities/ social media websites

• Online advertising

• Big data analysis/data mining/cloud services

• Product provision

• Recognizing time of purchase

Purchase process Purchase

• Generating preferences

Acquisition process Consideration

Digital business fields of instruments

• Identifying potential customers

• Market positioning of the product

• Creation of product/brand awareness

Tasks/Challenges

Contact process Awareness

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Another digital CRM instrument that is applicable through mostly all phases of the digital CRM process is the digital community, which brings together users with common interests and needs (Trainor et al. 2014). Users meet online seeking to exchange opinions and comments and to interact with each other through posts and messages. Since the members of a digital community have similar interests and preferences, companies bundle the purchasing power in homogeneous target groups (Wang et al. 2015b). Consequently, this enables to sustainably reduce scattering losses that occur in the case of traditional advertising (e.g., print or TV advertising). The contact process phase is associated with huge challenges and tasks since digital business companies are asked to identify potential customers and target groups to adequately position the product at the market. In the case of new products and services or unknown brands, a focal task of digital customer relationship managers is the creation of product and brand awareness. To face these challenges and fulfill the related tasks efficiently, already during the contact process, companies can extensively use methods of data mining and big data analysis for digital CRM. In this context, this method particularly allows to select specific target groups of customers for direct mail activities. Based on multidimensional customer profiles from internal customer databases, companies can select prospective customers characterized by high purchase probabilities from external databases by using complex search and comparison algorithms. Another powerful digital CRM instrument that may be used throughout the contact process is online advertising, e.g., banner advertising. The advantage of banner advertising is the direct two-way communication with prospective customers since the latter is directed to the provider’s website by clicking on the banner. In traditional mass media such as print or broadcasting, this possibility is limited because there is always a natural interaction barrier in terms of a media disruption. Along with providing the possibility of a direct two-way communication with prospective customers, digital communities of companies or social media websites (e.g., fan pages on Facebook) also enable companies to design a particularly effective contact process. The aspect of building trust through interaction and communication with the members of the digital community as well as among the members themselves plays an important role with regard to companies’ conclusions about the interests and preferences of customers (Saji et al. 2013). This allows to easily identify potential customers and specific target groups within the contact process. However, qualified contacts to potential customers can also be made in terms of sponsorship of discussion forums on the Internet. This refers to an exclusive placement of advertisements on relevant websites. Since discussion forums always have a topical reference, companies may address people with relevant interests and preferences. Within the acquisition process, the main tasks of digital business companies refer to the generation of user and customer preferences, the presentation of product advantages, and recognizing interested users/customers. During the acquisition process, companies can use data mining or big data analysis to reduce a variety of individual customer profiles to a few highly relevant groups (clusters) and thus address individual groups with individual messages (El-Zehery et al. 2014).

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In the case of collaborative filtering, for example, one compares the purchase behavior of customers with that of other customers. Thus, customers get special product offers and references to products, which have already been purchased by customers with similar interests (Shambour and Lu 2012). Amazon, for example, applies the method of collaborative filtering. The product recommendations often result in further sales and are considered as Amazon’s most powerful marketing tool. Besides data mining and big data analysis, companies may also provide interactive online forms as a digital CRM instrument in the acquisition process. In addition to gathering master file data (e.g., customer address, etc.), online forms are particularly used to survey the interests and preferences of prospective customers. Early registration of prospective customers at the company website allows companies to analyze the type of information retrieved from the potential customers by means of a so-called server log files analysis, thus enabling an evaluation of website usage. Special software provides statistics about usage frequency, access times, number of clicks, etc. In addition to registration, implementing cookie files also allows to identify users. Cookie files refer to small data sent from a website and stored in the user’s web browser when the user visits the website. When the user subsequently accesses the website, the cookies allow drawing conclusions about the user’s interests and preferences. If companies know the interests of potential customers, they may send them personalized messages (e.g., via email). Regarding company-to-customer interaction in terms of digital communities, the deployment of discussion forums within the community or on social media websites (e.g., fan pages on Facebook), for instance, serves to promote word of mouth and thus to generate cross-selling opportunities throughout the acquisition process. During the subsequent purchase process, a continuous (digital) dialogue with the prospective customer may enable the company to get insights on the time of purchase. Additionally, the Internet provides various possibilities for handling order acceptance, logistics, and payment in terms of an integrated supply chain (Frohlich 2002). Companies usually handle their order and payment processing digitally as well. Tangible products can be directly distributed without an intermediator (disintermediation). In the course of the usage process, digital business companies have to avoid cognitive dissonance referring to discomfort experienced by an individual, who is confronted by new information that conflicts with existing beliefs, ideas, or values. Another task is the service performance that is closely linked to the challenge of generating user/customer satisfaction. In this context, one digital CRM instrument is the concept of a service website. It is a particularly useful instrument for creating and maintaining customer loyalty (Gommans et al. 2001). On the service website, suppliers compile relevant information about the different products offered. This often occurs in the form of so-called frequently asked questions (FAQs). In addition, companies may implement contact points that enable customers to interact with the service department via email, chat function, or online form. Another instrument for achieving customer loyalty during the usage process is to offer free value-added services that supplement or expand the core product. Digital

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customer forums or social media websites (e.g., fan pages on Facebook) offer the opportunity to foster word of mouth within the existing customer base and, consequently, to generate cross-selling potentials. At the same time, such customer forums are also able to take over a part of the service functions. Hence, companies may reduce service costs for both customers and suppliers. The digital CRM instruments of the reacquisition process serve for fostering the customer’s reconsideration of a repurchase and therefore to bind existing customers to the company, brand, or product. Thus, challenges regarding reacquisition are getting insight to preferences, providing information on product improvements, recognizing time of purchase, and an efficient product provision. To face these challenges, data mining or big data analysis particularly serves for generating refined customer profiles from customer information gained during the customer relationship. Here, one can assign customers to four data categories (Link and Hildebrand 1995). The first category is the master file data that contain the address and other longterm consistent information that are independent of the company’s offers and campaigns. In contrast, the second category, campaign data, refers to information on customer-related activities of the company, which the latter has previously directed to the respective person. Response data, as the third category, include information regarding the impact of these activities. Finally, the potential data involve information about the demand behavior of customers, particularly containing information about which products are in demand at what time. Companies use this information to predict future customer value. Additionally, companies may introduce so-called digital test markets, in which existing customers may give feedback and suggestions on current products or prototypes of new products. This helps companies to better align their services and products with the requests and preferences of the customers. Thus, digital business companies have another instrument to increase customer loyalty and satisfaction. On the other side, digital business companies are asked to avoid customer churn in the case of user/customer dissatisfaction. The tasks and challenges in the customer churn process are analyzing customer churn, optimizing complaint management, and improving performance gaps. Especially in light of the relatively high degree of customer dissatisfaction in the phase of customer churn, instruments for analyzing the reasons of customer churn are crucial for digital business companies. An example of such an instrument exists in analyses based on data mining or big data analysis, for instance, in terms of a specific customer database that contains the customer history and the course of the business relationship (Verbeke et al. 2012). Moreover, corresponding digital communities or social media websites that enable dissatisfied customers to communicate their perceived dissatisfaction also provide important information and approaches to counteract customer churn. In the context of the recovery process, digital business companies have to fulfill various tasks since they face complex challenges. Initially, digital customer relationship managers have to set customer recovery targets to restore customer trust and optimize targeted and personalized services. Moreover, they have to use recovery incentives such as discounts and warranty conditions. Therefore, digital business companies may also rest upon data mining or big data analysis and customer databases in the recovery of certain customers or customer segments, since these

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particularly provide important data for analyzing customer value and recovery potentials. Also important is the further interaction with the potentially lost customers in terms of digital customer dialogue and digital customer forums. Additionally, companies may also offer service websites or social media websites providing free digital pre- and post-sales services in the course of the recovery process. Finally, for allowing recovery incentives, digital CRM managers have to deploy instruments involving digital incentive systems. For successfully managing digital business customer relationships, companies need to actively manage all phases of the digital CRM process (awareness, consideration, usage, reconsideration, dissatisfaction, and recovery). For this purpose, they must create and maintain adequate customer interfaces that support them in establishing integrated customer relationships (Feinberg and Kadam 2002). Companies have to actively design the relationships at all stages of the customer relationship process. Here, they may use a mix of previously used traditional methods of CRM and innovative applications of digital business. Moreover, it is important that they create customer interfaces in an integrated way, thus generating an integrated customer relationship. Figure 14.39 illustrates how big digital business companies offer an integrated customer relationship management by servicing customers with different service areas. Business Model-Related Customer Demand

Access/ Connection

Communication

Content

Search/ Context

Community

Commerce

• Free Basics/ Internet.org

• Facebook Messenger • WhatsApp

• Instagram • Facebook Feed

• Facebook Search

• Facebook Fan Pages • Facebook Groups • Instagram • WhatsApp

• Facebook Iframe Shopping

• OneDrive • Office 365

• Windows Live • Microsoft Outlook • Hotmail

• MSN • Xbox • Microsoft Music • Groove Music • Microsoft Maps

• Bing • Microsoft News

• Live Messenger • Microsoft Communities

• Microsoft Store

• Google Play • Google Music • YouTube • Google Maps • Google One

• Google Search • Google Assistant • Google News • Google Books

• Google Plus • Google Talk • Google Groups

• Google Shopping • Google Apps • Google Pay

Facebook

Microsoft

Google

• Google • Google Cloud Hangouts • Google • Google Currents Mail • Google Duo • Blogger • Google Fi

Fig. 14.39 Integrated digital business customer relationship management. Source: Wirtz (2013a, 2020b)

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Summary

• Digital marketing in the context of digital business has gained significant importance. A digital marketing strategy is based on strategic initiatives in companies and impulses, whereby the development process includes target planning and the subsequent formulation of a digital marketing strategy. • Target group selection requires to subdivide a relevant market according to specific criteria, such as relevance of purchasing behavior, profitability, and temporal stability. There are four main dimensions of market segmentation criteria, namely, geographical, sociodemographic, behavioral, and psychographic criteria. • Digital business plays an important role in all areas of the marketing mix. This includes the components of sales management, price management, product and service management, as well as communication management. • The central starting point of a successful implementation of advertising is (online) targeting, meaning the use of digital and automated, target group-specific advertising measures. The associated targeting process can be divided into five phases: scan/actual analysis, target/market definition, targeting instruments, implementation, and evaluation. • There are 16 different targeting methods, which can be divided into 6 main categories: technical-based targeting, language-based targeting, sociodemographic-based targeting, attitude- and behavior-based targeting, enterprise-based targeting, and integrated targeting. • Influencers such as bloggers and vloggers have gained increasing importance within brand and marketing communication. They are regarded as trustworthy, influential, and wide-reaching multipliers in social media such as YouTube or Instagram. • The provision of services and the management of customer relationships within a digital business context can be performed through multiple channels. The design and implementation of efficient multichannel management requires a strategic and goal-oriented approach. • The process of designing a multichannel system consists of four consecutive steps, namely, the analysis of the strategic initial situation, a market segmentation, the strategic definition of the multichannel management strategy, and the design of the multichannel management system. • Digital business-related customer relationship management aims at maintaining customer relationships in order to encourage customers who have already used a service to reuse this or another service. This management process consists of a sequence of phases including perception, consideration, use, reuse, dissatisfaction, and recovery. • The most important digital CRM tool is data mining, as its methods can be used in almost all phases of the customer relationship process. In this process, large datasets are analyzed that yield valuable information.

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Summary

Chapter 14 Questions and topics for discussion

Review questions 1. Describe the main objectives of digital marketing. 2. Outline the digital value chain of distribution. 3. Describe both the ICF model and the PCRI model. 4. Describe the strategic multichannel management process. 5. Describe the digital CRM process and the respective tasks and challenges.

Topics for classroom discussion and team debates 1. Discuss the advantages and disadvantages of digital marketing with regard to the identification and use of your personal data based on the different targeting methods. Which socially critical and legally problematic aspects are of particular relevance here? 2. Discuss the importance of influencer marketing within social media. Discuss to what extent influencer marketing is critical and whether influencer marketing is a new method of surreptitious advertising. 3. The combination of offline and online channel marketing leads to a multitude of information, transaction and service points. Customers are almost completely captured and addressed by customer touch points. Discuss the advantages and disadvantages of this complete “customer processing” for the individual consumer (transparent human, 24/7- accessible) and to what extent this is individually and socially desirable from the point of view of "commercialization".

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Contents 15.1

15.2

15.3

15.4

15.5

Basics of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relevance of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Classification of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Definition of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Suitability of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structural Framework of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Typology of Procurement Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ABC Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Classification of the Procurement Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Process of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Procurement Analysis Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Procurement Initiation Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Procurement Agreement Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Procurement Processing and Clearing Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actors Involved in Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forms of Interaction in Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-to-One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-to-Many: Sell-Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-to-Many: Buy-Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Many-to-One-to-Many: Buy-Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Punch-Out Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potentials of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time-Saving Potentials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Further Advantages of Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Procurement via Digital Marketplaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Evaluation of Digital Marketplaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Procurement Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analysis Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business and Product Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Process and Supplier Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_15

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Learning Objectives By working through this chapter, you will be able to: 1. Define digital procurement. 2. Describe the development of digital procurement and evaluate its suitability. 3. Identify the actors and illustrate the different forms of interaction within digital procurement. 4. Describe the different phases of the digital procurement process and identify the potentials of digital procurement along this process 5. Outline the implementation process of digital procurement.

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The ongoing globalization and increasing worldwide competition allow companies to source their production input globally. This also has a strong impact on the way companies select and purchase their goods and services. Whereas in the past the primary goal of procurement was to negotiate the lowest possible purchase prices, today the requirements are much more complex. In order to reduce the overall cost of procurement, low inventory levels, a small number of suppliers, and global purchasing sources should be pursued.1 From a holistic perspective, procurement can be assigned to supply chain management. The basic idea behind SCM is the inter-company networking of processes, which manifests itself in material, information, and financial flows. By optimizing the supply chain, the end product can be produced better, faster, or cheaper. In this context, procurement is the central element of the SCM. It ensures the supply of production goods. By using modern information and communication applications, procurement can be supported in order to enable its efficient execution. In the meantime, procurement through digital platforms is becoming a standard approach for companies of all sectors. The strategic design of companies’ digital procurement efforts, however, varies with regard to the goal and business model (Chaffey 2011) In the literature, there is a multitude of concepts and definitions related to digital procurement. This is associated with a certain lack of conceptual clarity. Accordingly, two existing definitions will be presented and distinguished from each other in the following. This chapter provides a closer look into the structure and process of digital procurement. For this purpose, Section 15.1 first outlines the various aspects of digital procurement including its relevance, definition, and suitability. Section 15.2 delivers a structural framework of digital procurement, while Section 15.3 outlines the development as well as the potential benefits of digital procurement for businesses in general. Finally, Section 15.4 provides guidelines for successfully implementing a digital procurement approach.

15.1

Basics of Digital Procurement

Digital procurement has undergone a development process since the end of the first Internet hype around the turn of the millennium. While proprietary, bilateral systems were used in the past, nowadays open applications with standardized data formats are increasingly used. The lower complexity reduces costs, as open applications with standardized data formats facilitate the integration of new providers and suppliers.

1

See for the following chapter also Wirtz (2020b).

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Relevance of Digital Procurement Companies attach substantial importance to the digitization of procurement. A survey conducted by the consulting firm PricewaterhouseCoopers based on statements from purchasers in 200 companies from 20 European countries shows that regardless of country, industry, and company size, purchasing departments see digitization as the second most important factor right after the general streamlining and rationalization of their organization (PwC 2019). Compared to other European countries, Norway and Germany have taken a pioneering position in terms of digitization of the procurement process. However, even in Germany, the majority of processes are still not digitized. While the procurement departments in Norway and Germany already have a digitization level of 44% and 43%, the rest of Europe has only 37% (PwC 2019). Digital procurement has become far more complex with increasing digitalization. In the beginning, digital procurement was based on supporting the exchange between buyers and sellers through electronic communication. Today, there are even fully autonomous digital processes that place purchase orders semi-autonomously and only require a controlling-related integration of the responsible actors. The handling of the entire procurement process from identification of demand to payment and receipt of goods is also called end-to-end process. If this process is mapped digitally, it is often referred to as source-to-pay or S2P, which covers all processes, such as pricing, accounts payable, as well as expenditure, supplier, purchasing, and service management. Since accurate and efficient ordering processes are based on a multitude of information, it is important to generate a comprehensive data basis. Thus, digital procurement heavily depends on a detailed data analysis of company and market data. In order to make the procurement process more cost-effective, especially in terms of personnel costs, and to ensure a high level of reliability, it is increasingly being automated. Algorithms are also being used that learn independently from given datasets and are thus equivalent to artificial intelligence. In industry, procurement processes are strongly linked to the production process. Global competitive pressure, high and individual customer expectations, as well as changing environmental conditions often lead to the expectation of a high degree of flexibility in production and corresponding procurement processes. In order to control these processes, all essential information must be generated in real time by sensors and transmitted to database. The integration of measuring and control points allows a demand-oriented, autonomous control of production and procurement. The term Industry 4.0 describes this autonomous control of industrial procurement and manufacturing processes. After all, digital procurement is based on an exchange between companies, which is critical to success and usually requires the highest level of security, as sensitive data on prices and products are exchanged. With increasing global networking, the risks in the area of cybercrime and industrial espionage also increase. This makes it important to protect the exchange between suppliers and purchasers from external influences. In this regard, the use of new cryptographic approaches such as the blockchain plays an important role. The PricewaterhouseCoopers survey shows that the areas of source-to-pay, data analysis, automation, Industry 4.0, artificial intelligence, and blockchain already

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play an important role throughout procurement processes. These approaches are expected to be further expanded in the future. Figure 15.1 shows the coverage of technology used by companies in Europe and their plans with regard to procurement. Share of companies that have started using digital tools in the area of digital procurement 100% 90%

81%

80%

75%

Share of companies that are planning to use digital tools in the area of digital procurement 100% 88% 88% 90% 80%

70%

70%

60%

60%

50%

60%

62%

50% 37%

40% 28%

30% 20%

64%

14%

37%

40%

36%

30% 20%

10%

10%

0%

0%

Fig. 15.1 Use of digital technologies in digital procurement. Data source: PwC (2019)

Classification of Digital Procurement Companies’ procurement departments used to have a rather singular target to negotiate low purchasing prices. This rather simple scope of activity has changed fundamentally. Nowadays, further aspects concerning the overall costs but also the complete supply chain management and the company’s strategy are central. By optimizing their business relationships with suppliers, companies can achieve better, faster, and cheaper production processes (Papazoglou and Ribbers 2011). In order to analyze digital procurement, it is important to first clarify its underlying understanding, as it comprises aspects of company targets, needs, problems, and potentials. Moreover, given that it is also used in many ways with different meanings in the context of purchasing of goods, quality management, logistics, and supply chain, this chapter begins with a clear definition of procurement. This selective use of the term procurement leads to difficulties in understanding in academia and business. Therefore, the following definition is supposed to create a general understanding. Definition of Procurement (Wirtz 2010b, 2020b) Procurement involves all activities and processes necessary to supply a demanding entity with input factors that the buying company (recipient) does not create itself.

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The rather wide definition allows incorporating all input factors such as ordinary physical resources or raw material goods and products but also rather abstract input such as creative and legal rights and other non-physical values. Regarding the operational service creation process, material, equipment, energy, rights, services, labor, information, and capital can be named as the most important procurement objects (Koppelmann 2004). Concerning the heterogeneity of the sourced input, companies usually do not procure all their input through one single department but rather allow various departments to some extent to purchase their own inputs. For example, the procurement or hiring of the employees required for the operational performance of services is handled by the human resources department. In contrast, the financial department is usually responsible for the procurement of capital. The performance of procurement tasks that are of outstanding importance for the future development of the entire company, such as the procurement of patents, concessions, or licenses, is often the responsibility of the company management (Tempelmeier 1995). For this reason, the concept of procurement is often limited to the provision of goods with special characteristics. Thus, independent organizational procurement units are only justified if specific goods have to be procured frequently or in large quantities (Günther 1993). Therefore, procurement in the narrower sense is to be understood as all those activities that are aimed at ensuring that the consumer goods (e.g., raw materials and supplies, purchased parts, as well as energy), durable goods (e.g., plants, tools), as well as services (e.g., transport and construction services) from the procurement markets are made available to the users in the company (Fieten 1992). Once the term procurement has been defined, the following section deals with digital procurement. However, digital procurement cannot be equated exclusively with a shift of procurement to online systems. A comprehensive analysis of procurement processes and instruments is required to make adequate use of the concept. For this reason, the concept of SCM is frequently associated with digital procurement as the superordinate framework. Digital procurement is only one part of the supply chain. As an integrative approach, SCM aims at a holistic representation of a company’s supplier relationships. It is characterized by material, data, and financial flows that map a supply chain across company boundaries from the producer of the preliminary product to the end consumer. Although digital procurement is a subordinate component of SCM, it has structural characteristics that go beyond SCM. For example, SCM focuses only on direct procurement, while digital procurement also covers indirect procurement processes. Regarding the production of light bulbs, for example, SCM ensures that all raw materials, such as glass and wire, and prefabricated sub-products, such as screw coils, which are required directly for production, are available. Digital procurement instruments can be used for this purpose. However, the SCM also ensures that some of the light bulbs are delivered as efficiently as possible to a manufacturer of lighting systems who then integrates them into his products.

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In addition to the procurement of glass and wire, digital procurement is also responsible for ensuring that sales staff have suitable PCs and printers for drawing up contracts with trading partners. These resources are not directly relevant for the production of light bulbs, but indirectly production would not be possible without them and the tasks and processes associated with them. The focus of digital procurement is therefore not only on supporting the primary value-added chain but also takes into account secondary procurement goods required for production. The consumption of these indirect goods is not necessarily directly linked to customer demand or production. If more light bulbs are sold in winter due to the increased use of lamps, this does not automatically mean that, for example, more PCs have to be purchased in the manufacturer’s sales department. These remarks show that both terms overlap in terms of content but that they also represent deeper processes. While digital procurement covers all procurement goods, SCM maps the entire value-added process. Figure 15.2 shows the intertwining and differentiation of the areas of application of both terms.

Supply Chain Management Procurement

Supplier • Provides input goods • The supplier can be both manufacturer and distributor of the goods • …

• Purchase of material for further processing or resale • Ensuring a supply of goods that is in line with demand

• Transformation processes by which various input goods are transformed into finished end products

Distribution/ Trade

Logistics

Production

• Planning, management and control of tangible and intangible asset flows

• Customeroriented provision of products and services on the market

• …

• Exchange of tangible and intangible goods

• …

Customer • Demanders of the respective end product or service • Provides financial compensation • …

• …

• … • Digital procurement

Digital analysis • Digital needs assessment • Digital inventory control • Digital evaluation of suppliers

• …

Digital agreement

Digital initiation

Digital processing/ accounting

• Digital identification of sources of supply or requests for proposals

• Digital negotiation

• Digital order monitoring

• Digital approval

• Digital receipt of goods

• Digital product and supplier selection

• …

• Digital budget release

• Digital ordering

• Digital inspection of goods

• Digital payment • …

• …

Fig. 15.2 Intertwining and differentiation of digital procurement and SCM. Source: Wirtz (2020b)

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Definition of Digital Procurement When using the term digital procurement in business practice and in scientific publications, a similar lack of definition can be observed as with the use of traditional procurement relevant terms. This fuzziness is illustrated by the example of Table 15.1, which provides an overview of scientific and practice-related definitions and descriptions of digital procurement. These definitions mostly refer to electronic procurement that can generally be understood as a synonym for digital procurement. A comparison of the definitions clearly shows different frames of reference and different emphases in terms of content. In subject-related terms, the use of the term digital procurement differs primarily in that Schubert (2002), Wirtz and Kleineicken (2005), Meier and Stormer (2012), and Chaffey et al. (2019) refer to relationships and processes in the context of procurement, while Papazoglou and Ribbers (2006) and Turban et al. (2015) refer directly to the procurement itself. In this point, their definition is narrower, as processes that only have a supportive character are not included. This results in different teleological implications, i.e., differences in the targeting or purpose orientation.

Table 15.1 Definitions of digital procurement Author(s) Bogaschewsky (1999)

Wirtz and Eckert (2001) Schubert (2002) Wirtz and Kleineicken (2005) Papazoglou and Ribbers (2006) Meier and Stormer (2012)

Turban et al. (2015) Chaffey et al. (2019)

Definition Electronic procurement (EP) ultimately represents a collective term for electronically supported procurement, without being able to clearly define what is meant by this. There is only agreement that the use of Internet-related technologies—TCP/IP, HTML, XML—and Internet services such as email, FTP, Telnet, newsgroups, and the WWW are core elements of EP concepts. In this paper, electronic procurement is understood as Internet-based procurement. Electronic procurement supports a company’s relationships and processes with its suppliers using electronic media. Electronic Procurement (short e-procurement) is defined as the support of organizational procurement activities through the Internet in order to increase procurement success. Electronic Procurement is characterized by the purchase of supplies and services over the Internet. E-Procurement refers to all relationship processes between companies and suppliers using electronic communication networks. E-Procurement includes strategic, tactical, and operational elements of the procurement process. E-procurement (electronic procurement) is the online purchase of supplies, materials, energy, work, and services. The electronic integration and management of all procurement activities, including purchase request, authorization, ordering, delivery, and payment, between a purchaser and a supplier.

Source: Wirtz (2001a, 2020b)

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Basics of Digital Procurement

589

The proponents of the idea of digital procurement as a relationship- and processoriented construct tend to aim at supporting or supplementing traditional procurement processes, i.e., they see digital procurement primarily as a support function for existing processes. In contrast, Papazoglou and Ribbers (2006) and Turban et al. (2015) distinguish digital procurement more strongly from traditional procurement instruments. From a functional point of view, the definitions also differ in terms of validity. This is particularly evident in terms of the technology covered. The majority of the definitions speak of a general digital form of support for procurement, which is even extended by a network aspect in Meier and Stormer (2012). Wirtz and Eckert (2001), Wirtz and Kleineicken (2005), and Papazoglou and Ribbers (2006) explicitly emphasize the supportive use of Internet technology and thus substantially limit the definitional scope. This makes sense to the extent that, from a pragmatic point of view, the Internet provides the infrastructure for the majority of current digital procurement applications. From a holistic view, however, this restriction to Internet technology is not adopted in this context. Instead, the network idea of Meier and Stormer (2012) is considered, as this is typical for the interaction potential within digital procurement systems. In addition, at least two parties (buyer and supplier) are involved in each procurement process, so that in the case of complete digital procurement these parties must be networked in at least a rudimentary way. Furthermore, similar to Schubert (2002) or Meier and Stormer (2012), a supporting function of digital procurement is defined. This means that applications that do not completely map the procurement process, but are responsible for sub-processes, can also be considered. In the following, the definition of the term digital procurement is summarized on the basis of the previous explanations. Definition of Digital Procurement (Wirtz 2001a, 2020b) Digital procurement is the integration of network-based information and communication technology to support operational activities and strategic tasks in the procurement department of a company. Considering the targets of digital procurement, two specific dimensions are relevant. On the one hand, there are ordinary procurement targets such as timely supply to an appropriate price and, on the other, specific and often strategic targets that are necessary to be considered. There are two different approaches addressing the targets of procurement. On the one hand, the factual targets relate to the factual sourcing to produce respective goods and services, focusing on securing the timely supply of input factors. On the other hand, the formal targets focus on financial measures such as cost reduction. Another differentiation divides strategic and operative targets. While strategic

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targets focus on securing competitive advantages and business opportunities, operative targets aim at increasing efficiency in supply, storage, and production. One specific target of procurement is the increase in efficiency. Here, three aspects are of particular importance: time efficiency, cost reduction and data analysis, and thus value chain optimization (Meier and Stormer 2009). Since digital procurement allows connecting business with procurement transactions, it provides substantial time savings, reduces administrative processes, and improves the handling of materials. This creates cost savings through efficiency gains, such as less paper consumption, less personnel involved, less storage, and reduced failures in production. The third component of digital procurement relates to the data created through digital procurement activities. The automated and comprehensive collection and analysis of (big) data enables companies to trace and thus optimize all actions, allowing them to identify and adjust inefficiencies.

Suitability of Digital Procurement Due to their product characteristics and the characteristics of the procurement markets assigned to them, procurement goods are suitable for different types of procurement. As mentioned in the beginning of this chapter, there are differences in terms of relevance among purchasing goods. A broad distinction can be drawn between direct and indirect goods (Tripp 2002; Schubert 2002). Direct goods are input factors for the direct production process that are combined with other components and thus refined. Raw materials, individual parts, or system components can be mentioned as examples in this context. Indirect goods, by contrast, have a production-supporting character and are often called MRO (maintenance, repair, operation) goods (Kalakota and Robinson 2001). They are usually consumed and not processed. Examples are tools, spare parts, cleaning agents or office supplies. Moreover, MRO goods are usually strategically less relevant as they are mostly not purchased in the same frequency as direct goods. However, the expenditures on indirect goods are particularly relevant for the service sector (Dolmetsch 2000). Concerning the procurement organization, one can differentiate between unstructured and structured procurement. While structured procurement shows elements of automation and planning, unstructured procurement relies on individual involvement of personnel with regard to product research, as well as individual ordering and approvals. The underlying structure is important to be considered for a respective digital procurement implementation project. In order to introduce a comprehensive digital procurement system, it is therefore important to analyze the current situation. Respective goods have to be classified according to their ability to be standardized and their relevance in relation to the costs of production. Figure 15.3 illustrates the development of this classification. Direct and indirect goods are usually also the basis for differentiating conventional procurement processes. While there are mostly structured processes for direct goods, indirect goods are usually unstructured (Subramaniam and Shaw 2004). The

15.1

Basics of Digital Procurement

591

high

low

Processof Standardization

High Value, Direct Goods Low Value, Direct Goods

Indirect Goods (MRO, C-Goods)

• Reduction of information costs • Intelligentagents

• Reduction of process costs • Digital Catalogs

Raw Materials

• Reduction of production costs • Auctions, exchanges

• Integration of suppliers • Digital Collaboration

Relevanceof the productin relationto the productioncosts high

low

Digital Procurement Potential Legend:

Very low

Low

Medium

High

Very High

Fig. 15.3 Development of digital procurement. Source: Wirtz (2001a, 2020b)

high volumes demanded as well as the risk of delivery failure result in significant effort to standardize procurement processes. Although this is less important for indirect goods such as MRO or consumables (C-goods), they are an ideal starting point for implementing digital procurement structures, as they are not only available in standardized fashion but also repeatedly purchased by the respective company (Nenninger 1999). Companies or even private customers use these goods in similar or equal forms, which are therefore mostly offered by many suppliers. Digital procurement helps to easily compare goods in digital catalogs and thus to find the most suitable suppliers in terms of price, quality, and delivery options. The next class of goods—low-value direct goods—are subject to digital procurement but are less standardized and accordingly cannot realize the same efficiency gains as the previous class of goods. Cost reductions are particularly possible in connection with innovative price-finding procedures, such as reverse auctioning systems or the involvement of intelligent agents (Turban and Sipior 2015). Due to the growing experience in the use of digital procurement and the increasing functionality of digital procurement software, raw materials and high-quality direct goods can be procured digitally to a greater extent. In this context, the aim is to reduce the product costs as well as to integrate suppliers into the own procurementrelated value chain. The growing global inter-connection on B2B platforms increasingly leads to transactional service offerings (Timmers 1999). However, complex goods or

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customized products that cannot be offered in a standardized manner are less likely to be purchased in an automated way. Furthermore, modern marketplaces allow collaboration among market participants to get better prices and make use of economy of scales for services and goods that target a specific need they share. The following section describes a structural framework that takes account of these aspects.

15.2

Structural Framework of Digital Procurement

Similar to all processes in a company setting, the procurement activities and their components can be summarized in a structural framework. Figure 15.4 provides a structure of digital procurement, consisting of a typology of procurement goods, processes of digital procurement, as well as actors involved and forms of interaction. The following sections address these four dimensions and outline their most important aspects.

Typology of Procurement Goods

Forms of Interaction

Processes of Digital Procurement

Actors involved

Fig. 15.4 Structural framework of digital procurement. Source: Wirtz (2001a, 2020b)

Typology of Procurement Goods In general, companies procure a large number of tangible and intangible goods in order to maintain the processes of service provision and to produce the services themselves. The traditional procurement function is characterized by many complex problems. In this context, the disproportionality of strategic and operative procurement activities must be emphasized (Dolmetsch 2000). Unlike the classification of goods into first order, rebuy, and routine purchasing, the typology of procurement goods rather focuses on the characteristics of goods and their suitability to digital procurement. One of the major inefficiencies of procurement efforts refers to treating all orders equally with regard to time and resources

15.2

Structural Framework of Digital Procurement

593

invested. As a result, strategically less important goods are treated similar to those that are strategically more important. It is therefore essential to consider the difference between operative and strategic procurement efforts. In general, there is an asymmetry of strategic and operative procurement activities in the ratio of 30:70 (Mattes 1999). An efficient procurement management aims at standardizing and maximizing automation of operative procurement efforts. The sourcing of core input factors that are strategically important to the company’s value proposition, however, should be the focus of the procurement department. The typology of the respective goods can follow different criteria.

ABC Analysis One of the most prominent systematization concepts of input factors is the ABC analysis that divides the goods into three categories A, B, and C (Lukinykh and Lukinykh 2015). The value of goods provides a basis for clearly differentiating the three product classes. Usually, A-goods are responsible for a great part of the product costs, although their importance in terms of quantity is low. Raw materials and semifinished parts are typical A-goods. Taking the example of a computer, a typical A-good is the processor chip that is high in value but only represents a small part of the computer. According to the ABC concept, A-goods not only have a higher purchasing price but also a greater strategic price and value. The relative low volumes procured should not lead to less attention. The opposite is true: the procurement department must focus particularly on those goods that are relevant to quality, since those goods are usually highly relevant for the value proposition of the good or service. C-goods are generally cheap and characterized by high volumes. Natural resources, consumables, and operating material, such as screws and packaging material, are typical C-goods. In some cases, the costs for the ordering process are even higher than the effective order value (Eyholzer and Hunziker 1999; Schäffer et al. 1999). Because of their low value, the procurement effort and the (cognitive) involvement of personnel should be limited in this context. The focus should be to source the goods in the most automated and standardized manner. B-goods have characteristics of both A- and C-goods. They have significant value and are purchased in relatively high volumes. For this reason, a selective approach is promising in this area, which, depending on the specific individual case, is based on management for A- or C-goods (Wannenwetsch 2002). Complex or highly specialized B-goods, such as memory modules, should be procured in a product cost-optimized manner, while B-goods that are required frequently or in large quantities, such as tires, should be procured in a process cost-optimized manner. While the product costs are decisive for A-goods, the process costs are in the foreground for C-goods (Stoll 2007). Moreover, these goods require a standardized procurement process that involves a close follow-up by the respective procurement personnel.

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The advantage of the ABC analysis is its simple application to even complex procurement schemes. The further analysis of the sourcing requires consideration of different important dimensions. This, for instance, not only comprises the complexity of the market from which a good is sourced, including the number of suppliers and their respective market power and accessibility, but also the relevance of the product with regard to the factor mobility.

Classification of the Procurement Market In order to enable a systematization of the procurement goods that goes beyond a quantity/value relation, the classification of the goods according to concrete criteria is also useful. Thus, goods can be classified according to their importance for the own value-added process and according to the complexity of the respective procurement market. As a result, additional information can be obtained on the extent to which a procurement good is suitable for processing via digital procurement. Some goods have a very high value for the respective company and influence the product significantly. In this regard, the purchase price is only of secondary importance. An example of this is a display for mobile phone production. Regarding this type of goods, long-term supplier relationships should be targeted by appropriate supply chain management. The value of the goods is less relevant than their availability on the procurement markets. Thus, some goods have a low value and are nevertheless difficult to procure. Special chemicals, for example, are often only available from selected and appropriately instructed companies and can be of critical importance, as an interruption in supply could lead to production losses. Other goods are easier to procure in a standardized form. Routine parts such as MRO goods that do not directly enter the value creation are characterized by their low value as well as the simplicity of procurement. The aim in this area is to reduce the costs of the procurement process. For this class of goods, the implementation of a Desktop Purchasing System (DPS) represents a suitable option. A DPS is a network-based software that allows employees to obtain information on procurement goods via a uniform interface in the form of a digital catalog. Furthermore, this catalog enables the direct ordering of goods. Thus, the employees in the company place their orders themselves via the digital catalog system (Meier and Stormer 2012). In addition, payment and delivery processes are also supported digitally (Dolmetsch 2000; Meier and Stormer 2012). In addition to the analysis of the complexity of the procurement market and the importance of procurement, the automation potential and strategic importance of the respective goods can also serve as a classification mechanism. In this context, the strategic potential of specific indirect goods is particularly emphasized. For example, an indirect good such as a factory building can have a high strategic value. Thus, indirect goods are not necessarily of subordinate importance.

15.2

Structural Framework of Digital Procurement

595

Low

Strategic Importance

High

Digital procurement is particularly suitable if the procurement process can be standardized and appropriate market players are accessible via digital channels and in case of frequent purchasing processes. This is where indirect goods in particular can be summarized. The automation potential is usually derived from the degree of standardization. An office article, for example, a hole punch, is standardized and can be ordered automatically without any problems. It is not necessary to formulate the requirements for the hole punch again for each order process. But even less strongly standardized goods can be processed via digital procurement after an initial specification. When both content dimensions are combined, an evaluation matrix with four types of purchasing situations is obtained. Figure 15.5 illustrates this approach to the analysis of procurement goods. In each case, concrete recommendations for action are derived for the implementation of digital procurement. The “investment purchase” quadrant contains goods of high strategic value and low automation opportunities in procurement. These include, for instance, production halls. Digital procurement can only be used to the extent that a large number of offers can be generated via online tenders.

Investment purchase: Capital accumulation

Logistics purchasing: Failure minimization

Characteristics • Core business needs • Individual requirements • High value/small quantity

Characteristics • Production requirements • Frequent procurement • Product selection in advance • Large quantity

Examples • Machine tools • Land and buildings

Examples • Tyres • Chemical raw materials

Solution • Calls for tenders

Solution • EDI • Supply chain management

Selective purchasing: Condition negotiation

Demand purchasing: Standardization

Characteristics • Different types of requirements • Irregular ordering • Product selection as required • Variable value/quantity

Characteristics • Individual demand • Frequent procurement • Product selection as required • Low value

Examples • Individual company cars • Individual office furniture

Examples • MRO goods • Production-related small parts

Solution • Individual solutions

Solution • Desktop purchasing

Low

Automation Potential

Fig. 15.5 Strategy/automation potential matrix. Source: Nenninger and Lawrenz (2002)

High

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The relevant instruments are called request for proposal (RFP) for non-binding proposals or request for quotation (RFQ) for concrete offers (Bogaschewsky 2002). The area of “selective purchasing” is characterized by low values both in terms of strategic importance and the degree of automation. The goods required vary considerably and must be ordered at irregular intervals. A typical example is an additional company car that has to be procured for a newly established job. In this regard, online tenders or individual solutions such as an auction portal can be used for procurement. The goods in the “logistics purchasing” quadrant exhibit high strategic value and at the same time high automation potential. They are usually classified as direct production goods and must be procured in large quantities on a regular basis. Typical examples are processors used in the manufacturing of complete PC systems. The purchasing strategy in this area should strive for an automated digital procurement processing. Finally, the area of “demand purchasing” includes goods that have a high degree of automation but are only of minor strategic importance. Thus, especially the classic MRO goods, such as office supplies, are included. The reduction of process costs is more important in this area than the reduction of product costs. Here, the introduction of desktop purchasing systems is suitable, in which the respective user can place the order himself. In this context, master agreements with suppliers are recommended. This comprises, for instance, special conditions for the purchase of printing paper in small but cumulative quantities. Overall, when evaluating the scheme, it is noticeable that goods with a high degree of automation tend to be more suitable for digital procurement processing. In addition to the suitability of procurement goods, the individual phases of procurement must also be considered during the design of a digital procurement system. Digital procurement can assume a variety of functions in the respective process steps. The following section therefore deals with the phase concept of procurement and its implications for digital procurement.

Process of Digital Procurement The procurement process consists of the four phases: analysis, initiation, agreement, and processing/clearing. Each phase has its own process that is associated with specific activities. Figure 15.6 illustrates the digital procurement process along with its different phases (content based on Hartmann 1999; Weigel 2015; Wirtz 2016b, 2018b; Heinecke 2017; Inside Business 2019). It is important to note that this approach is only an exemplary procurement process that may exist in various realizations or constellations.

15.2

Structural Framework of Digital Procurement

597

Needs Assessment

Payments

Inventory Control

Auditing

Receipt of Goods

Analysis

Processing/Clearing

Order Monitoring

Supplier Assessment

Phases of Digital Procurement

Ordering

Agreement

Initiation

Identifying Sources Request for Quotations

Selection of Product and Supplier

Permission

Negotiation

Budget Release

Fig. 15.6 Phases of digital procurement. Source: Wirtz (2020b)

Digital Procurement Analysis Phase The analysis phase is the starting point in the procurement process. In this regard, a need is identified and sources for a solution are assessed. The analysis phase can be divided into three subphases: needs assessment, inventory control, and supplier assessment. Figure 15.7 shows the analysis phase of the digital procurement process (content based on Wirtz 2001a). The first subphase represents the assessment of a need or the notice of a shortage by company personnel. This assessment of a quantitative or qualitative deficit or input factors, products, or MRO goods may take place in a cyclical valuation or by an announcement on the part of the demanding unit. An essential step is to control the inventory of the company to avoid dead stock. Therefore, an alignment of inventory requirement is carried out by calculating stock differences. If respective goods are not in stock or have reached a minimum stock level, a company searches and evaluates potential suppliers and initiates an initial contact. If goods are standardized, a company can automate this procedure to a level that does not require further personnel involvement. At this stage, the assessment of potential suppliers

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Initiation

Analysis

Needs assessment

Inventory control

• Specification of the procurement objects

• Comparison of requirements with stocks

• Determination of the procurement objects by users

Agreement

Digital Procurement

Processing/ Clearing

Supplier assessment • Search and evaluation of potential suppliers

• Difference formation

• Contact

•…

•…

•… Fig. 15.7 Analysis phase of digital procurement. Source: Wirtz (2020b)

becomes important. Potential suppliers have their offers and stock available on respective online marketplaces. Respective algorithms can predict prices and delivery times and thus present sufficient data for selecting an appropriate supplier. Due to the Internet, the procuring company may create improved and nearly global market transparency with regard to the goods and services to be procured. In this context, so-called software agents assist and support the actors involved to manage the tremendous wealth of information. Software agents are computer programs that search the Internet for potential suppliers and filter offers and deals. An example in the B2B context are the platforms Thomasnet.com or ec21.com. The analysis phase can be supported by using a desktop purchasing system. In this regard, the analysis phase can be carried out as follows: the employees of the specialized departments of a company and the procurement department work out an overview of the goods to be procured automatically in the future. In doing so, they draw on experience of previous years. In addition, the stock of the respective goods must be analyzed. Finally, based on the bundled demand data, master agreements are concluded with suppliers. If this procurement process involves a new or modified repurchase, the procurement department first looks for potential sources of supply. In terms of searching new sources of supply, digital procurement has substantial advantages over traditional procurement. On the one hand, the Internet enables improved and almost worldwide market transparency with regard to goods and services for the procuring company. In this context, software agents support the procurement actors in coping with the immense variety of information that arises. Software agents are computer programs that search the Internet for potential suppliers and filter out adequate offers.

15.2

Structural Framework of Digital Procurement

599

On the other hand, during the analysis phase, the Internet enables the buyer to play an active role in obtaining new sources of supply and data through the tendering process. This enables companies to publish their demand for goods on their own homepage and to make use of complex negotiation mechanisms by providing relevant information. This concerns, for example, the desired product quality or the delivery conditions. For instance, an online auction can be used instead of a traditional tender. Invitations to tender are particularly common in the public sector, where digital procurement is also increasingly applied (Wirtz et al. 2010a). In addition to sourcing, a procurement website also has the function of presenting the company as an attractive transaction partner and promoting a preselection of qualified suppliers (Kleineicken 2004; Wirtz and Kleineicken 2005). In this context, however, it is important to note that on an open company website, competitors can also see the invitations to tender and can therefore anticipate new products at an early stage. If the disclosure of the company’s entire purchasing spectrum appears too risky, a selection stage can be inserted. In this case, the potential suppliers only receive the exact tender data after a selection procedure, the so-called request for information (RFI) (Block 2001). In order to optimize the subsequent process steps in procurement, it must be considered that the technical specifications are as exact as possible in the course of the tender (Bogaschewsky 2002).

Digital Procurement Initiation Phase The initiation phase begins with the identification of concrete sources of supply and the submission of requests for quotations. The knowledge gained in the analysis phase is used as a basis for selecting potential suppliers. In this way, suppliers can be evaluated and, if necessary, excluded on the basis of their previous performance and other information obtained. This exclusion is especially important for companies when it comes to goods that endanger the operative business. In this regard, potentially unreliable suppliers can be sorted out of the procurement process right from the beginning. Once a selection of potential suppliers has been made, a catalog of criteria can be drawn up at company and product level in order to evaluate both the type of delivery and the goods. In this context, specific goods can also be ordered or selected from the supplier’s catalog of offers, which are finally procured. A criteria-based selection of deliveries is often based on indicators that can provide information about the performance of a supplier. These can be based on samples or specimens that can be checked by the respective ordering department. The procurement of a product always goes hand in hand with securing sufficient financial resources. In the procurement process, the selection of suppliers and products therefore must be accompanied by the release of a corresponding budget for procurement. It becomes apparent that the procurement department must

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collaborate with the production and logistics units and the finance and accounting departments of a company. Figure 15.8 shows the initiation phase of the procurement process (content based on Wirtz 2001a). The electronic stock control additionally enables the permanent stock check of the respective goods. In the course of identifying procurement sources during the initiation phase, online information services are relevant for digital procurement. In this context, digital business companies may gather information on the current situation of demand and supply and therefore relevant product prices in terms of specific industry newsletter or online trade journals. Another important aspect with regard to the identification of sources during the initiation phase is that digital procurement has significant advantages over the traditional procurement.

Analysis

Initiation

Identification of sources of supply/ requests for quotation

Agreement

Product and supplier selection

Processing/ Clearing

Budget release

• Containment of potential suppliers

• Criteria-specific selection of the supplier(s)

• Provision of financial resources

•…

• Product selection

•…

•… Fig. 15.8 Initiation phase of digital procurement. Source: Wirtz (2020b)

Digital Procurement Agreement Phase The agreement phase begins with the ordering process. This includes negotiations on the price and scope of the order. After master agreements have been concluded with potential suppliers in order to implement a desktop purchasing system, the users carry out their procurement processes independently by accessing digital product catalogs. Digital product catalogs are only partially comparable with a conventional paper catalog. After all, digital product catalogs have additional features, such as the availability of textual and graphic presentation of the goods. For example, it is possible to use multimedia in order to present the goods in the form of threedimensional drawings, video sequences, or voice recordings.

15.2

Structural Framework of Digital Procurement

601

In addition, the digital catalogs offer search functions that allow product searches by keywords or product attributes as well as searching along the catalog’s product hierarchy (Dolmetsch 2000). There are basically three different approaches to creating and managing these digital product catalogs (Walser and Zimmer 1999; Tripp 2002): buy side, sell side, and digital marketplace. Figure 15.9 depicts the agreement phase of the procurement process (content based on Wirtz 2001a). Access to the digital product catalogs is provided by a user-friendly graphic interface that is accessed via a web browser on the intranet or the Internet. It is possible to customize the user interface and the type and number of procurement objects. This enables the procuring employee, on the one hand, to select a product that corresponds to his or her area of activity and function and, on the other, to his or her competencies with regard to procurement (Hartmann 1999). In this regard, a personal login enables the assignment of employees to respective authorization groups. Moreover, it is possible to favor certain products or suppliers by specifying a sequence. A sequence can be based on criteria such as the lowest purchase price, the fastest delivery time, or preferred procurement from specific suppliers (Dolmetsch 2000). These measures can proactively support compliance with the procurement policy or procurement guidelines. In addition, it is guaranteed that only listed articles can be procured from registered suppliers. The phenomenon of maverick buying, which can often be observed in practice, is the procurement of goods from unofficial suppliers or by circumventing the prescribed path of procurement. The use of appropriate information technology can reduce the frequency of this phenomenon (Mattes 1999; Eyholzer 2000). Maverick

Analysis

Initiation

Authorization

Negotiation • Negotiation of prices • Negotiation of purchase quantities •…

Agreement

Processing/ Clearing

Order

• Verification of the specification

• Binding submission of the order

• Authorization of the order

• Transmission of the order to suppliers

•…

•… Fig. 15.9 Agreement phase of digital procurement. Source: Wirtz (2020b)

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buying is particularly problematic because the purchase quantity on which the contract with the supplier is based may not be fulfilled or certain actors may be favored. However, maverick buying also occurs when products are needed faster than the usual suppliers can deliver. Digital procurement reduces procurement time and eliminates the need for manual invoicing, eliminating the need for maverick buying. The purchase request runs through an authorization process depending on the defined user profile. The user can only automatically procure the preselected articles configured for him or her within his or her budget. If the purchase order remains within the defined budget rules, the system approves it directly. However, if the procurement limits are exceeded, a digital approval procedure is triggered. The system sends the purchase request to the relevant approval instances for authorization. Usually, the approval instances are the line manager, the purchasing specialist, or a procurement controller (Hartmann 1999; Dolmetsch 2000). Once the purchase request has been authorized, it is transformed into a purchase order. In this context, a purchase order is a formal request to a vendor to provide certain goods and services under the specified conditions (Dolmetsch 2000). Accordingly, the purchase order represents the conclusion of the procurement decision and serves as a basis for the incoming goods and invoice verification. Enterprise resource planning (ERP) systems are software solutions (e.g., SAP ERP) that are used for the company-wide control and evaluation of processes in the areas of production, sales, logistics, finance, and human resources. In addition, the data is transferred to the appropriate supplier. This automated transmission of orders reduces not only the administrative effort but also the ordering time. In addition, by comparing the data, the orders are automatically transmitted and also directly transferred to the supplier’s ordering system. This reduces processing time and avoids the risk of entering incorrect order data due to a media discontinuity (Tripp 2002).

Digital Procurement Processing and Clearing Phase The processing and clearing phase begins with the monitoring of the order. Similar to the selection of suppliers or products, the monitoring of orders is also carried out decentrally when using a desktop purchasing system. Tracking functions enable the user to check the approval status of the purchase request as well as the current status of an existing order from the workstation. Figure 15.10 shows the individual steps of the processing and clearing phase within the procurement process (content based on Wirtz 2001a). In addition to querying the processing status of the order with the supplier, access to the tracking information of logistics service providers such as DHL or UPS is sometimes also possible (Meier and Stormer 2012). Furthermore, digital procurement systems typically offer the possibility of supplier evaluation. In the context of order monitoring, companies are increasingly using radiofrequency identification (RFID), a digital electromagnetic technology for transmitter-receiver systems. With this technology, tags attached to goods can be automatically identified and tracked.

15.2

Structural Framework of Digital Procurement

Analysis

Monitoring

603

Agreement

Initiation

Inspections of goods

Incoming goods

• Tracing/ monitoring the order status

• Calculatory check of the order

• Quantitative and qualitative testing of goods

• Monitoring of delivery times

• Comparison of incoming goods and purchase order

• Notification of incorrect deliveries

•…

Processing/ Clearing

Payment • Settlement of claims •…

•…

•…

Fig. 15.10 Processing and clearing phase of digital procurement. Source: Wirtz (2020b)

In general, the Internet of Things (IoT) and its technologies are playing an increasingly important role in procurement management and represent the latest development toward process automation. In this context, the automatic reordering of inventory is of particular importance. This refers to the ability to automatically recognize the need for orders and replenish goods accordingly. SAP, for example, has developed a vending machine that records or tracks consumer trends, provides alternative purchase recommendations, and automatically places orders for new stock. Supplier profiles can be created by compiling historical delivery information, such as average delivery time and quality. These can be used to assess supplier performance in the context of strategic procurement activities (Dolmetsch 2000). If the incoming goods are received decentrally, this is referred to as desktop receiving (Kleineicken 2004). In this case, the recipient also handles the inspection of goods. By using the electronic recording function of the procurement software, a delivery can be checked, accepted, and registered as received. In addition, incorrect, over- or underdeliveries, complaints, or returns can be recorded by the responsible employees of the purchasing company (Eyholzer and Hunziker 1999; Dolmetsch 2000). The task of invoice verification is to check the correctness of incoming supplier invoices. In contrast to traditional procurement, this verification is no longer the responsibility of the accounting department. Instead, the department that has ordered the respective goods is responsible. The accounting department is only consulted in the event of incorrect invoices. Otherwise, their tasks with regard to digital procurement are restricted to spot checks and the financial treatment of collective invoices that were agreed in the master agreement (Hamm and Brenner 1999). In terms of payment processing, already existing payment forms, such as the traditional bank transfer or electronic funds transfer (EFT), can be retained.

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Another possibility is the use of purchasing cards. This credit card-like system authorizes the user to place orders within a defined transaction limit and to initiate payment to the vendor’s account after receiving the invoice. This in turn decentralizes processes and competencies, since each party is involved in payment processing and is responsible for its own procurement expenditures. Purchasing cards are primarily used for transactions with low value (Laudon et al. 2010). Purchasing card service providers often belong to banks or credit card companies and support their corporate customers in booking, billing, and reporting. A typical example is the purchasing card from AirPlus International. The shareholders of AirPlus International are the Bayerische Landesbank (Bavarian State Bank) and Lufthansa. The focus of the service is accordingly in the area of business travel or business travel management. The Shell Corporate Card, a personal fuel card for employees with company cars, represents another example. As described above in the course of the individual phases, digital business companies have specific applications and software available to support the procurement process in each phase and to perform the specific activities efficiently. Regarding the applications and supportive software, the integration of information and communication applications takes place within all subphases of the procurement process. Figure 15.11 illustrates the described technological applications by presenting the supportive information and communication software and systems that are deployed in each phase of the procurement process (content based on Wirtz 2001a). In summary, the applicability of digital procurement at any phase of the procurement process is potentially given. By means of the targeted and individual analysis of the sub-processes in terms of their integration capability into the digital procurement, it is possible to specifically identify opportunities for automation. Therefore, employees working in the digital procurement division of digital business companies are challenged to implement the automation in the individual phases. After the successful implementation, the constellation and interests of interaction partners and market participants have to be considered when performing the digital procurement activities. The next section therefore presents the actors involved and forms of interaction by describing the interaction partners, interaction typology, and transaction mechanisms. Digital Procurement Analysis

Initiation

•Digital inventory control

•Digital product catalogs

•Information services on the World Wide Web

•Digital integration of the procurement guidelines

•Software-agents

•Peer-to-peer-networks

•User-friendly browser function

•Homepage of companies

•Digital budget release

•Procurement-initiated tenders and auctions

•…

•…

Processing/Clearing

Agreement •Use of digital tools in price negotiations •Standardized approval work flow

•Digital transfer of the order to ERP and/or suppliers •…

•Tracking-function (e.g. RFID) •Reporting-function •Use of IoT-based technologies (e.g., proactive reordering) •Desktop receiving

•Digital payment •…

Fig. 15.11 Procurement applications and supportive information and communication technology. Source: Wirtz (2020b)

15.2

Structural Framework of Digital Procurement

605

Actors Involved in Digital Procurement The procurement process usually involves coordinated and systematic cooperation of various people who belong to different hierarchical levels and different functions. Digital procurement systems only involve staff at critical decision points or where electronic algorithms or sensing is not possible. This helps to make the procurement process as efficient as possible. This is achieved by separating strategic and operational procurement tasks. Thus, tasks related to procurement take place where they can be carried out most effectively. While digital procurement enables the user to carry out in particular operative procurement activities, the employees of the purchasing department can concentrate on strategic procurement management activities. This creates scope for intensifying supplier management or procurement market research (Eyholzer 2000). When implementing comprehensive digital procurement systems, it is important to involve all departments and respective staff. The purchasing department selects the products to be procured electronically as well as suitable suppliers, defines decision criteria, and negotiates conditions for master agreements. The IT department clarifies the necessary system resources and operational issues. This includes, for example, the integration into a merchandise management or ERP system. Moreover, appropriate documentation and data collection are crucial factors for a subsequent analysis and potential improvement of automation. In addition, also external actors are relevant. In this context, suppliers that need to align their technical requirements with those of the digital business company are of particular importance. Here, the focus is on the automated adaption and transmission of data. Other external actors of digital procurement are, for example, software producers. They design and implement the software based on the respective requirements and customer feedback.

Forms of Interaction in Digital Procurement Regarding the forms of interaction, the use of digital procurement has several alternatives concerning the interaction between buying companies and suppliers. The alternatives can be classified according to the three dimensions: (1) typology reflecting the relation between the participants, (2) interaction partners illustrating the number of actors involved, and (3) access structure involving the ownership of access to the digital procurement system. Figure 15.12 summarizes the related interaction typology of digital procurement. One-to-one procurement relations are bilateral partnerships established between a supplying and a demanding company. The Internet and other electronic data interchange (EDI) systems are the bases of such relationships. An example of this type is the strategic partnership or search deal between Yahoo and Mozilla that makes Yahoo the default search engine for the Internet browser Firefox in the United States. One-to-many business relationships are characterized by a company’s attempt to find various contractual partners. Here, one distinguishes according to the

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Typology

One-to-One (e.g. YahooMozilla Partnership)

Access Structure

Interaction Partners

Supplier

(Sell-Side Solution e.g. SAP ERP)

Buyer

Supplier

Digital Procurement

Buyer Buyer Buyer

• Proprietary

• Proprietary or Open

One-to-Many

(Buy-Side Solution e.g. VW Group Supply)

Supplier Supplier Supplier

Buyer

Many-toOne-to-Many (e.g. eBay Business Supply)

Supplier Supplier Supplier

Virtual Exchange

• Mostly Proprietary, Closed

Buyer Buyer Buyer

• Mostly Open

Fig. 15.12 Interaction typology of digital procurement. Source: Wirtz (2001a, 2020b)

dependence of the platform to the sell or buy side (Papazoglou and Ribbers 2011). If one supplier has several buying companies and offers a respective procurement platform, it is called a sell-side solution. A sell-side solution is, for instance, the software SAP ERP supplied by SAP to various companies worldwide. If a buying company offers a sourcing interface to numerous potential suppliers, it is called a buy-side solution. A buy-side solution, for example, is the Volkswagen’s B2B digital procurement platform VW Group Supply on which multiple suppliers can register in order to do business with Volkswagen. The third alternative is the many-to-one-to-many approach, consisting of a number of suppliers and corporate buyers and resting upon a third-party digital marketplace (Turban et al. 2018). An example of this type is eBay’s B2B marketplace eBay Business Supply on which companies are able to purchase a variety of goods from several product categories, such as manufacturing and metalworking or office. Depending on the type of interaction, different types also emerge from certain access limitations. Possible alternatives are open systems that are not subject to access restrictions to potential buyers or suppliers. However, there are also restricted systems in which access is controlled (Preißner 2002; Tripp 2002). The level of limitation varies from simple registration and signing a master agreement to a complex application for participating in the digital market. The spectrum of methods in this context ranges from simple registration to the application for participation in digital procurement. The latter variant can be carried out, for example, by the supporting consortium of a marketplace or for the inclusion of products in the internal product catalog of a large company. These interaction alternatives are examined in more detail below.

15.2

Structural Framework of Digital Procurement

607

One-to-One As mentioned above, one-to-one systems establish a bilateral relationship between a purchasing company and a supplier. These point-to-point connections are often based on electronic data interchange (EDI) technology (Dolmetsch 2000). EDI is a data service for the paperless exchange of structured data between companies. The EDI concept was developed in the transport industry and was initially used for logistics control between transport service providers and financial institutions. However, widespread adoption of this solution has been prevented by the complex and costly technological requirements that EDI imposes on corporate hardware and software. For example, the transmission formats must be synchronized between the procuring company and the supplier. In addition, the compatibility between different suppliers is often lacking because many proprietary systems are used. With further developments of traditional EDI, the Internet is used for data transfer. In some cases, the Internet is only used as a platform for existing EDI systems. In this case, the EDI data is transferred using email or FTP services (Internet EDI) (Wecker 2006; Laudon et al. 2010). Today, data is increasingly stored in the so-called XML format that offers further advantages over traditional EDI in addition to cross-system usability. For example, the contents are extracted from a raw database using XML and prepared for the needs of the company according to the intended use. The nonspecific storage of the contents makes them easier to integrate and exchange. For example, the use of XML languages makes the transfer of graphics conceivable. This was previously not possible with EDI systems. One of the advantages of one-to-one relationships based on EDI is the optimal coordination of the systems used between the transaction partners. However, the establishment of such a solution usually leads to long-term customer/supplier relationships. A particular disadvantage is the fact that the implemented system may represent sunk costs if the relationship is terminated. In addition, new supplier relationships require a renewed agreement on the transmission and data standard.

One-to-Many: Sell-Side Sell-side solutions focus on the supplier company. The supplier implements, usually on its own website, a digital catalog that contains information on the company’s available product range, its availability, and expected delivery dates of each item. Procuring companies have the possibility to access this product catalog via the Internet and order articles online. For the purchaser, this procurement alternative primarily results in acceleration and improvement of information. Direct access to the seller’s databases makes it possible to determine which products are available and when they are available for delivery. Apart from the costs of obtaining information, there are no implementation and maintenance costs for the product catalogs. However, sell-side solutions are still associated with disadvantages for the procuring company. These disadvantages

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become particularly apparent when the digital catalogs of several suppliers are accessed. After all, neither the access nor the user guidance is standardized within the various supplier systems. In addition, an inter-connection of these systems to the ERP system of the procuring company can usually only be achieved with tremendous effort. This sometimes requires expensive customized software solutions. In addition, the existence of different passwords, inconsistent systematization of items, and different ordering modalities reduce the comparability of offers and thus the potential benefits of these systems.

One-to-Many: Buy-Side In the case of buy-side solutions, the focus is on the procuring company. It creates a multi-supplier catalog from individual supplier catalogs, which is usually stored on the company’s intranet (Meier and Stormer 2012). In this case, the digital catalogs can be connected relatively easily to the ERP or financial management system via an interface (Papazoglou and Ribbers 2006). This enables the further processing of completed orders within the company. One of the advantages of the buy-side solution is the reduction in the cost price of the items in demand. It is also possible to realize cost savings through tenders. A further advantage is the effective coordination of the buy-side solution with the company’s own ordering processes. Regarding this, the selection of available products that can be ordered is adaptable to the exact needs of the respective companies. Only relevant consumer goods are included in the catalog. However, setting up and operating a buy-side solution requires considerable resources. For example, it has been found that the creation and continuous updating of a multi-supplier catalog can cost up to 2 USD per catalog line (Walser and Zimmer 1999). Therefore, this variant of digital procurement can only be implemented sensibly in larger companies. In addition, the buy-side instrument often focuses on the procurement of indirect goods from the circle of established suppliers. In contrast, the active acquisition of new suppliers is not envisaged.

Many-to-One-to-Many: Buy-Side The one-to-many alternative solutions focus either solely on the supplier side (sellside solution) or on the side of the procuring company (buy-side solution). In contrast, in a many-to-one-to-many relationship, suppliers and procuring companies come together by involving a neutral intermediary. This is a digital marketplace. It is usually established and maintained by independent third-party companies. Both buyers and suppliers thus access an external system. Regarding the characteristics of digital marketplaces, a distinction can be made between the transaction mechanisms applied and the orientation of the marketplace. The typical transaction mechanisms of such digital marketplaces are digital business directories, bulletin boards, digital auctions, digital exchanges, as well as digital catalogs. These are shown in Fig. 15.13 with their main characteristics.

• Bids and offers ordered by digital product categories

Digital Bulletin Board

• The digital market facilitates the matching between buyers and sellers, but does not guide the transactions

• Pricing process without involvement of the virtual market

• No time limit and possibility to withdraw orders and offers

• Possibility to update digital product data, to enable individualization and to provide additional information

• Mostly fixed prices

• Aggregated and standardized digital catalog of various suppliers

• Digital market allows trade between buyers and sellers through reception and comparison of bids and offers • Dynamic pricing process in real time

Digital Catalog

Digital Exchange

Transaction Forms

Fig. 15.13 Transaction forms of digital marketplaces. Source: Wirtz (2001a, 2020b)

• Time limit and no possibility of withdrawing deals

• Dynamic pricing process

• Digital auction of a good or service

Digital Auction

• Providing company links

• Support of contacting and sourcing

• Presentation of up-to-date company information of an industry

Digital Business Directory

15.2 Structural Framework of Digital Procurement 609

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A digital business directory lists businesses within categories such as location, sector, activity, size, links, etc. An example of such an online business directory is naics.com, with over 19 million company entries. It presents up-to-date company information and usually brings along respective search options. There are two data collection approaches: the directory operator itself creates the data and companies fill in their own information. Apart from generating indirect revenues through advertising, many of these directories also offer a premium option for companies that want to present more than just the basic information in the directory. Unlike the digital B2B directory, a bulletin board presents concrete bids and offers by digital product categories. An example of a bulletin board is the online platform MyHammer.com on which private persons and companies can advertise tradesmen services and demanders can make respective offers. They work similar to simple newspaper announcements. In many cases digital bulletin board operators also offer a notification service for companies that are interested in specific bid and offer categories. Some of the announcements are invitations to quote or an expression of interest and thus initiate a tender process. However, the bulletin board operator is not further involved in the pricing process or the subsequent transaction. The digital bulletin board therefore represents one of the simplest form of information service, as it is limited to facilitate the matching between buyers and sellers. A digital auction is a dynamic price-finding mechanism that comprises all types of auctions. An example of a digital auction platform is eBay Business Supply on which businesses can make bids for a variety of goods covering manifold product categories, like fuel and energy or agriculture and forestry. In general, most auctions are limited to a certain time frame. Some entail a preselection step to allow only pre-verified companies. Classic tendering is a form of auction in which a certain service or product is requested for which companies can bid. The processing of such dynamic price-finding tool by means of ICT technology is called digital auctioning. Digital exchanges are matching platforms such as Intercontinentalexchange.com or ec21.com that allow trade between buyers and sellers through receiving and comparing bids and offers. Offers and bids for homogeneous goods are matched in an order book. The dynamic pricing process usually takes place in real time and allows to present a market price. In this mechanism, no time limit is necessary as transactions and deals are made as soon as bids and orders match. This also allows participants to withdraw or amend orders and offers before deals are made. Digital catalogs are databases of products or services with fixed price tags. Microsoft, for instance, uses the direct sale via a digital catalog based on the extranet system and successfully achieves software sales with various channel partners. Interested companies can search and order the respective products and services listed in the e-catalogs that allow quick and easy updates of product and service offers, in contrast to traditional catalogs. With regard to the orientation of digital marketplaces, horizontal and vertical marketplaces can be distinguished (Voola et al. 2012). Horizontal marketplaces offer goods or services that are subject to inter-sectoral demand. Examples in this context are C-products or maintenance, repair, and operations (MRO) goods. In contrast, vertical marketplaces align their portfolio to the needs of a particular industry, such

15.2

Structural Framework of Digital Procurement

611

as the steel or the chemical industry (Turban et al. 2006). Here, industry-specific A-, B-, and C-products are traded. The main objective of vertical marketplaces is the identification and solution of industry-specific issues. Figure 15.14 shows the orientation of digital marketplaces. The procuring company benefits from the advantage of using a digital marketplace in terms of lower implementation costs compared to a buy-side solution (Papazoglou and Ribbers 2006). Thus, participation in digital marketplaces is particularly suitable for companies that do not have the resources to implement a proprietary procurement solution. In addition, the neutrality of marketplace operators can prevent unilateral dominance by individual companies. However, there are also special marketplaces that have been set up by individual large companies or groups of companies. In the literature, they are referred to as industry consortia (Laudon and Traver 2017). These platforms attempt to pool the market influence of the organizations involved. Therefore, they tend to have a buy-side or sell-side orientation. Despite the lower implementation costs, marketplaces pose the challenge of integrating purchasing data into the existing ERP landscape. The relevance of digital marketplaces, especially consortia, has declined in recent years. Some major projects of industry-wide platforms, such as Covisint in the automotive industry or MetalSite in the metal industry, have disappeared in their original form. They have either downsized, stopped operating, or reduced their software tools to a specific area. Excessive expectations with regard to potential savings were the reason for this negative development. An alternative to digital marketplaces is a punch-out system. This variant of interaction in digital procurement will be examined in detail below.

Vertical • Intersectoral portfolio

• Orientation towards branches and its requirements • A-, B- and C-products Horizontal • Intersectoral portfolio • Orientation towards functions/processes • C-product, MRO-product

Branch A (e.g., steel industry)

Branch B (e.g., chemical industry)

Vertical marketplace A (e.g., steellink.com)

Vertical marketplace B (e.g., chemdeals.com)

Function I (e.g., MRO)

Horizontal marketplace I (e.g., alibaba.com)

Function II (e.g.,temporary work)

Horizontal marketplace II (e.g., upwork.com)

Fig. 15.14 Orientation of digital marketplaces. Source: Wirtz (2001a, 2020b)

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Punch-Out Solution Using special software, companies can combine the characteristics of buy side, sell side, and marketplace. This process is known as punch-out or round trip (Schubert 2002). An internal system forms an artificial buy side and manages access to the various external interfaces. At the same time, it is connected to the company’s own ERP, so that orders can also be entered directly into the merchandise management system. This means that the company does not manage the catalogs itself. Instead, it automatically feeds them into an internal system. When a user accesses the system to order adhesive tape and writing instruments, he or she is initially forwarded from the internal system to the supplier’s external catalog via punch-out. A connection to the system of the procuring company remains but is not visible to the user. He or she fills the shopping basket with the relevant articles and completes the order by means of the external catalog. The order is not directly sent to the supplier but is routed back into the procurement system of the procuring company. There, the order may be subject to an approval process and is then entered into the ERP and sent to the supplier in a final step. Digital marketplaces can only be integrated into this process if they also support the punch-out solution. In this case, the request from the user is routed via the marketplace to the supplier and vice versa. This has the advantage that a larger number of suppliers can be accessed, since proprietary systems are very expensive and not every company provides or can provide all information in accordance with various technical standards. The consistent use of data standards such as cXML or OBI by the procuring companies, the marketplace, and the supplier is the central prerequisite for such a system (Papazoglou and Ribbers 2006). Therefore, it must be clarified before implementation to what extent this condition is met. The procuring company has permanent access to current supplier data without the cost of its own content management system. However, when accessing different catalogs of several suppliers, the disadvantages of a punch-out solution become apparent. The individual catalogs of the various suppliers are usually designed differently and therefore do not have a uniform user interface. In addition, the users have to filter out irrelevant procurement goods themselves. Furthermore, the arrangement of the individual products on the ordering side is sometimes suboptimal for the procurer. For example, cheaper suppliers of writing instruments may be positioned in a list behind expensive brand manufacturers, so that the latter are selected more frequently. Suppliers benefit from a punch-out solution in that they only have to maintain a central catalog and do not have to send out individually updated data and catalogs. Thus, the advantages and disadvantages of this type of digital procurement must be carefully weighed up before implementing a punch-out solution. The implementation of digital procurement provides various benefits to all actors involved including both the supplier side and the buyer side. The deployment of specific digital procurement applications and supportive software facilitates efficient performance throughout all phases of the digital procurement process. In addition, the transaction mechanisms of digital marketplaces lead to great advantages and

15.3

Potentials of Digital Procurement

613

enable a readily orientation toward horizontal and vertical marketplaces. In summary, digital business companies profit from the possibilities of digital procurement since it holds numerous potentials for their daily business with regard to the procurement of their products and services. The following chapter outlines these potentials by discussing the influence on time, cost, and strategic use, as well as presenting the opportunities and threats to digital markets.

15.3

Potentials of Digital Procurement

Digital procurement provides various advantages and benefits in terms of flexibility, efficiency, and effectiveness for companies’ procurement activities. In particular, the sourcing process via the Internet offers some essential advantages. This applies to both the intra- and inter-organizational areas of procurement. In the intra-organizational area, the automation of procurement processes, the associated shortening of throughput times, and, as a result, the reduction of procurement process costs can be considered as advantages (Papazoglou and Ribbers 2006). Operational procurement activities can be delegated directly to the user due to their computer-based support. The reduction of the procurement process time is achieved by digitizing, automating, and standardizing manual processes (Turban et al. 2018).

Time-Saving Potentials Against this background, the average duration of an intra-organizational procurement process can be reduced from an average of nine days to one and a half days (KPMG Consulting 1999). Figure 15.15 illustrates this shortening of the procurement process (content based on KPMG Consulting 1999 and Lawrenz and Nenninger 2002).

1 day

2 days

Traditional Procurement

Determine type and quantity of required goods, fill out requirement notification

Digital Procurement

Type and quantity of required goods, price comparison/availability check, source selection

Authorization of the department manager

1 day

2 days

3 days

Procurement department archives Authorization catalogs, compares controlling prices, selects source of supply

Authorization work flow dependent on the value of goods

0,5 day

Automatic order initiation when authorization is received

1 day

Order

Confirmation via email

Order confirmation from the central procurement department

Total of 1,5 days

Total of 9 days

- 83%

0 days

Fig. 15.15 Procurement process optimization through digital procurement. Source: Wirtz (2020b)

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The relief of the procurement function creates temporal space for strategic and inter-organizational aspects. In the inter-organizational field, the minimization of process interfaces is particularly noteworthy. Due to digitally based transactions, redundant activities can be eliminated and processes optimized. For example, the use of automated transactions via a marketplace platform leads to a quantitative or qualitative improvement with regard to the research of supply sources. As a consequence, a reduction in purchase prices can often be observed.

Further Advantages of Digital Procurement In addition, digital procurement relieves procurement departments of operational tasks, which enables them to focus on strategic issues such as procurement market research or relationship management (Puschmann and Alt 2005; Turban et al. 2018). Figure 15.16 outlines the cost, time, quality, and integrated advantages of digital procurement. Time savings can be attributed to the potential of accelerated order processing and a reduction in throughput and delivery times. A potential reduction in purchase prices as well as the reduction of personnel, storage, and logistics costs results in a reduction of total costs. The increase of procurement quality results in a reduction of data entry errors and improved procurement marketing. The strategic benefits also lead to an improvement of outsourcing decisions and supplier relationships (Puschmann and Alt 2005). This can be attributed to the increase of information quality. In addition, the digital support of supply chains leads to a better accessibility and integration of suppliers (Wecker 2006). However, the interaction at digital marketplaces also carries threats that have to be considered when analyzing and implementing digital procurement activities. For example, the return on investment (RoI) of digital procurement solutions is often set too high. This is associated with unrealistic savings expectations in the long-term evaluation of the systems. The reason for this misplanning is the fact that time-related process cost savings are added to the expected RoI, even though no procurement employees are released and thus no accounting-relevant effects occur in this area (Peukert and Ghazvinian 2001; Chaffey et al. 2019). The potential of shifting the focus of procurement activity to strategic concerns cannot always be immediately proven. This is due to the duration of master agreements. It is therefore particularly relevant to distinguish between direct and indirect savings potential. While the former manifest itself in a reduction of product costs, indirect savings potential reduce the process costs of procurement. However, this reduction in process costs is usually not directly measurable. The problem in this context is that a large part of the directly measurable costs for implementing digital procurement is incurred at the beginning of the implementation, whereas the majority of the measurable savings are achieved after a certain period of time (Peukert and

15.3

Potentials of Digital Procurement

615

Cost Advantages • Cost advantages through standardized IT systems/input (reduction of personnel costs, etc.) • Cost advantages through time savings in procurement interaction (information, purchasing, delivery, etc.) • Cost advantages through low capital commitment in the procurement process • Cost advantages through digital just-in-time delivery (handling and storage cost reduction, etc.) • Cost advantages through system synergies of business processes (SAP, accounting etc.) • Cost advantages in terms of payment processing • Cost advantages through global sourcing in digital procurement •…

Integrated Advantages • Business process improvement in procurement by digital twins • Integrated organizational advantages through company-wide organizational processes (integrated SAP support/connection, etc.) • Greater ability to act and react to market changes • Lower capital commitment and financing advantages • Development towards a digital organization or a digital network organization (extended enterprise concepts, etc.) •…

Time Advantages

Quality Advantages

• Prompt negotiation, authorization and ordering (digital just-in-time, etc.)

• Information transparency in digital procurement ensures a higher quality level (customer and user reviews, etc.)

• Reduction of processing and delivery times through direct digital transmission • Efficient and fast communication through digital exchange

• Information transparency in digital procurement ensures improved price-performance ratio (digital price search engines, etc.)

• Processing of time-consuming formalities with administrations/authorities through digital exchange

• Reduction of media breaks as well as input or ordering errors (automatic IT system checks, etc.)

• Continuous availability for digital procurement (24/7)

• Digital procurement improves just-in-time delivery reliability and commitment (delivery quality, etc.)

•…

• Merging of digital supply chains with suppliers • Digital procurement improves the ability to act and react in ordering and delivery processes • Quality advantages through global sourcing in digital procurement •…

Fig. 15.16 Advantages of digital procurement. Source: Wirtz (2020b)

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Ghazvinian 2001). The choice of software and transfer protocols can also be critical when implementing digital procurement (Davila et al. 2003). Despite increasing standardization and opportunities to convert data, a change of transaction partners may result in the need for new investments. In particular, smaller companies can be overwhelmed by this. However, transactions are often dominated by the stronger side of the market (e.g., large companies). In this regard, large and influential companies can dictate the trading system and the associated transaction modalities (Papazoglou and Ribbers 2006). In addition, it must be ensured that the implementation is company-driven rather than technology-driven. In many cases, the potential of digital procurement cannot be tapped because the tools are not aligned with the company’s goals or have not been sufficiently aligned. Although technical tools are available, they do not serve as a solution to relevant problems in the procurement department. However, companies should not focus on using as many available technologies as possible or copying competitors’ systems but rather on putting together a mix of suitable tools tailored to the needs of the company in question. Apart from that, the loss of savings can be considered problematic. Various causes can be responsible for this process (Hawkes et al. 2005). For example, savings opportunities are often diluted in the budgeting of individual company departments. From the department’s point of view, the goal is to stay within a certain budget without additional effort. As a consequence, budgets are often set high. However, this conceals the full cost-cutting potential of digital procurement. As a further consequence of this departmental selfishness, funds saved in excess of the budgeted savings targets are spent on other procurement goods, which further reduces the measurable cost reduction. In addition, a change in the basic assumptions of the procurement forecast is also conceivable as a reason for a loss of savings. For instance, in a raw materials crisis, production resources can become much more expensive, so the savings potential achieved by digital procurement is overshadowed by the price increase. In addition, the phenomenon of maverick buying remains even after the introduction of digital procurement. Thus, this phenomenon can only be mitigated. This is especially true for procurement processes that are difficult to automate, such as the procurement of an advertising banner by the marketing department (Hawkes et al. 2005). Moreover, if the savings potential has been formulated too optimistically, it cannot be achieved (Hawkes et al. 2005). In this respect, specific potential can be used for the evaluation of digital marketplaces that are illustrated in the following.

Digital Procurement via Digital Marketplaces Participation in digital marketplaces is generally associated with the exploitation of efficiency potential with regard to procurement. It can be stated, however, that procurement via digital marketplaces not only offers opportunities but also presents various risks. These are illustrated in Fig. 15.17.

•…

•…

Fig. 15.17 Opportunities and threats of procurement via digital marketplaces. Source: Wirtz (2001a, 2020b)

• Digital marketplaces cover only part of the procurement process

• Marketplace operator knows purchasing behavior and benefits from derived data about the transactions of the company

• Certain types of transactions may cause higher prices (e.g., digital auctions)

• Dependence on technological functioning and liquidity of the digital marketplace for mission-critical A-goods

• Risk of Lock-in to bilateral virtual marketplaces to investments in specific technology of the digital marketplace

• Risk of dependence on dominant digital marketplaces

• Adaptation to individual requirements not entirely possible: Previously used proprietary procurement systems (e.g., EDI) may be sunk costs

Threats

• Faster response ability by increased information efficiency

• Outsourcing of functions to operator of the digital marketplace

• Procurement automation of C-goods and MRO goods

• Stronger negotiating position through demand aggregation

• Expansion of the supply base and transaction forms

• Lower as agreed/adjustment costs through digital communication

• Lower initiation costs by preselection via digital supplier catalog

• Better comparisons through search functions and intelligent agents

• Increased market transparency and reduction of purchase prices

Opportunities

Opportunities and Threats of Procurement via Digital Marketplaces

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As mentioned earlier, digital procurement systems offer companies substantial business opportunities that also bring along certain threats. One of the major opportunities refers to increased market transparency and the reduction of purchase prices. In addition, search functions and intelligent agents enable better comparisons and preselection via a digital supplier catalog. In addition, there are potential cost reductions regarding the initiation, agreement, and adjustment of procurement relationships. In contrast to company-internal digital procurement solutions, the participation in digital marketplaces requires less technical know-how and less IT infrastructure. This also helps to save resources (Tripp 2002). Moreover, the enlarged procurement radius will allow the expansion of the supplier base. The use of digital procurement also facilitates procuring companies to consider international suppliers. Given their geographical distance, these suppliers might not have been considered previously (Papazoglou and Ribbers 2006). In general, the use of the Internet for digital procurement results in an improved ability to react to changes in the market or supplier structure, as this information is available more efficiently via the Internet. This increases the flexibility of the procurement process for the procuring company (Stoll 2007). However, procurement via digital marketplaces also involves risks that should not be underestimated. In this context, the inter-connection to the company’s own ERP system and the realization of sunk costs with regard to already existing but incompatible digital procurement systems can be named as risks (Preißner 2002). In addition, there is the risk of becoming dependent on dominant digital marketplaces, as the operator of the marketplace can obtain information on the procurement behavior of the companies (Tripp 2002).

Evaluation of Digital Marketplaces In order to benefit from the opportunities and avoid the risks of digital marketplaces, it is necessary to carry out a suitability analysis based on company-specific criteria. Such criteria include the liquidity of the marketplace, the performance of the software, the additional services offered, or the technical and management-related knowledge of the marketplace operators. Figure 15.18 shows a possible evaluation scheme to assess the performance of a digital marketplace. Once the opportunities and risks of various digital procurement solutions have been generally assessed, the next step is the implementation of new procurement instruments. In order to avoid mistakes, it is important to establish a well-founded plan and to consider specific organizational features. The basics of this process are discussed in the next section.

15.4

Digital Procurement Implementation

619

Evaluation Scheme for Digital Marketplaces Description/Content

Liquidity

Software Performance

Services

Significance

• Number of active participants • Type and quantity of traded goods and services • Functionality, scalability, reliability, security, integration, accessibility, usability • Industry news, expert opinions, search engines, price comparisons • Support payments, logistics, ERP system

Expertise of Operator Anonymity/ Neutrality Legend:

Very low

• General expertise of management • Industry know how on the structure, relationships and specific problems • Executing the transaction without the knowledge of partners • No influence of the transaction Low

Medium

High

Very High

Fig. 15.18 Evaluation scheme for digital marketplaces. Source: Wirtz (2001a, 2020b)

15.4

Digital Procurement Implementation

A crucial factor in the process of implementing digital procurement is the recognition that it is not exclusively a technical process (Wirtz et al. 2010a). This corresponds with the view of Preißner (2002) who states that digital procurement does not begin with software but with the head. Consequently, a systematic analysis and planning process should be carried out, before a system is introduced. In some cases, extensive change processes are necessary that must take into account the technology but also the organization, the suppliers, the qualification of the employees, and the project team responsible for the implementation. These points can therefore be regarded as success factors of implementing digital procurement (Peukert and Ghazvinian 2001). Thus, comprehensive change management is the basis of a successful implementation of digital procurement. In this context, a structured and systematic approach to digital procurement implementation is recommended. For this purpose, a digital procurement implementation process consisting of nine steps is described below. Figure 15.19 outlines the digital procurement implementation process. The process model of the nine steps of digital procurement implementation can be divided into an analysis phase and an implementation phase. The analysis phase refers to the preparation of the implementation and comprises of various analysis. The implementation phase deals with the realization of the digital procurement system. The analysis phase and implementation phase are discussed in the following two sections.

Analysis Phase

Supplier Analysis

3

Digital Procurement System Data Migration & Pilot & Testing & Training

Digital Procurement System Running & Deployment

7

8

Digital Procurement System Monitoring & Audit

Digital Procurement System Design/Development

6

Implementation Phase

Fig. 15.19 Scheme of digital procurement implementation. Source: Wirtz (2018b, 2020b) • Optional redesign activities

• Continuous monitoring of digital procurement IT system & applications & audit of improvement potential

• Running & deployment of digital procurement IT system & applications

• Staff & supplier training for new digital procurement IT system & applications

• Migration of data to new digital procurement IT system & applications, pilot testing & optimization

• Development & optimization of company-specific digital procurement IT system & applications

• Design & adaption of digital procurement IT system & applications

• Final selection of digital procurement IT system & applications

• Analysis & evaluation of digital procurement IT systems & applications, identification of short list

• Design of the new digital procurement master plan/concept

• Integrated digital procurement analysis (first 3 steps) & definition of final digital procurement system & process requirements

• Identification of digital procurement supplier integration requirements & digital redesign success factors

• Analysis of suppliers cost/benefit ratio, ABC selection of suppliers & core suppliers

• Redesign of the new digital procurement process & procurement value generation

• Analysis of procurement process and identification of weaknesses in procurement chain

• Identification of procurement requirements with regard to company, products & services

• Analysis of procurement challenges in company value generation

15

9

Digital Procurement System Evaluation & Selection

5

Definition Digital Procurement Master Plan/Concept

Digital Procurement Process Analysis

2

4

Business & Product/ Service Analysis

1

9 Phases of Digital Procurement Implementation

620 Digital Procurement

15.4

Digital Procurement Implementation

621

Analysis Phase At the beginning of every digital procurement implementation process is the analysis of the starting position. The main aim is to create an overview of the relevant products, services, processes, suppliers, and decision-makers. The first step of the analysis phase is the company and product or service analysis. Here, the digital business enterprise should evaluate potential challenges that may arise with regard to the value creation of the company. In addition, the determination of procurement demands in terms of products and services is important. The next step refers to the analysis of the digital procurement processes, which in addition to examining the procurement process and identifying weaknesses in the supply chain also includes the redesign of the new digital procurement process and the value creation. The third step of the analysis phase includes the analysis of the suppliers. In this context, the procurement department evaluates the relevant suppliers in terms of their cost-benefit ratio and on the basis of an ABC selection. Another important aspect of the supplier analysis is the identification of technical and organizational requirements for the integration of the suppliers. The last step of the analysis phase is the definition of a master plan and concept with regard to digital procurement. This step requires a customized digital procurement analysis that is carried out by integrating the first three steps and defining the final digital procurement system and its process requirements. This preliminary work is used to design the new digital procurement master plan. The following process analysis examines the traditional procurement process and identifies critical success factors (Kalakota and Robinson 2001; Möhrstädt et al. 2001). The aim is to identify improvement potential and savings through the new procurement instruments. The final supplier analysis assesses the existing supplier relationship with regard to its suitability for digital procurement. In addition, an overview of the technical accessibility and the corresponding costs will be prepared (Kalakota and Robinson 2001). Based on this initial data and already identified potential for improvement, digital procurement can be implemented. Figure 15.20 outlines the sequence of the analysis phases in a condensed form.

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Analysis Phases of Digital Procurement Activities

Business and product analysis

Process analysis

Content

Results

•Overview of all procurement/applications within the organization

•Organization chart of the purchasing department

•Initial assumptions on weaknesses

•Differentiation of the pilot project according to inefficient processes/product segments

•Description of the procurement process

•Detailed description of the examined procurement processes

•Identification of improvement potential/critical success factors

•Analysis of the realizable process savings

•Identification of savings potential

•Selection of important suppliers

Supplier analysis

•Evaluation of suppliers/costs for the integration of a supplier

•Evaluation overview of the suppliers

•Clarification of EDI connection, web presence, digital product catalog

•Adaptation strategy that defines goals, budget, schedule and resources

•Estimation of the costs of integration

Fig. 15.20 Analysis phases of digital procurement. Source: Wirtz (2001a, 2020b)

Business and Product Analysis The first step in the analysis phase is to look at the purchasing organization itself. The focus lies on the corporate structure and the strategic aspects of implementation. For instance, digital procurement can be aligned with the corporate e-commerce strategy at this point (Turban et al. 2015). Based on the analysis of weaknesses in the procurement process, companyspecific goals and potentials can be derived. Furthermore, the product segments that can be procured digitally are selected. This can be done using the procedures for the procurement goods typology.

Process and Supplier Analysis In the process analysis, the traditional procurement processes are described and critical success factors are identified. In order to ensure consistent digital procurement, it is crucial to analyze existing procurement processes holistically. This prevents redundant work and the waste of time and resources (Möhrstädt et al. 2001). If no process analysis is conducted, potentially inefficient procurement processes will be transferred to the new system, and thus the full potential of digital procurement cannot be exploited.

15.4

Digital Procurement Implementation

623

In the course of the process analysis, it must be decided which sub-processes of the procurement should be supported digitally. In doing so, it must be weighed up to what extent the support of a sub-process is preferable to a comprehensive transformation of the procurement process. The number of employees working in purchasing, their geographical distribution, the approval workflow, and the degree of centralization of procurement can also be assessed (Turban et al. 2015). Figure 15.21 shows the procurement process and various digital procurement instruments. While workflow systems can accelerate the process flow and booking systems ensure integrated purchase processing, Figure 15.21 shows that only a comprehensive digital procurement or ERP system can cover the entire procurement process by integrating at least these two components. Online catalogs and online ordering options that only support individual elements of the procurement process can be integrated. The analysis of procurement processes is closely linked to the selection and evaluation of suppliers. This aspect is taken into account in the subsequent supplier analysis. In addition to technical factors, such as transmission and data standards as well as the associated costs, this phase primarily evaluates the suppliers’ ability to integrate

Needs Assessment/ Order Authorization

Goods Delivery/ Receipt of Incoming Goods

Order Placement/ Order Execution

Order Payment

Tasks • Determination of needs

• Placing of orders

• Delivery of goods

• Execution of orders

• Receipt of goods

• Comparison of purchase possibilities

•…

• Goods receipt inspection • Forwarding of incoming goods

• Identification of ordering options

•…

•…

• Execution of the financial transaction • Optimization of the payment management •…

Potential Applications of Information Systems • Integrated digital procurement or ERP system

• Integrated digital procurement or ERP system

• Integrated digital procurement or ERP system

• Integrated digital procurement or ERP system

• Stock management catalog

• Email/workflow system

• Email/workflow system

• Digital accounting system

• Order entry on the website

• Digital reservation system

•…

• Web catalog • Email/workflow system

• Digital reservation system

•…

• ...

• Digital provision of the product (e.g. software) •…

Fig. 15.21 Digital support systems for the procurement process. Source: Wirtz (2020b)

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into the digital procurement system. In this context, product data of the desired quality and interfaces for digital ordering, payment, and the exchange of business documents are of particular relevance. In addition, it is often evaluated to what extent the supplier assumes implementation costs or makes price concessions. An adaptation strategy is derived from the data obtained, which defines the schedule and the necessary resources for the digital procurement implementation (Dolmetsch 2000). This analysis phase serves as a concept for digital procurement implementation. Figure 15.21 shows the digital support systems for the procurement process.

Implementation The analysis phase lays the foundation to begin with the implementation of the new digital procurement system. Various problems can arise that can lead to the failure of implementation (Neef 2001). For example, managers who are not part of the purchasing department may not recognize the benefits of digital procurement. This can be caused by a lack of strategic integration. If digital procurement is perceived as an isolated tool, it cannot unfold its full potential. When changes to work processes and employee tasks are made after implementation, the positive effects of the project are delayed. In addition, poor internal corporate communication can lead to misunderstandings among employees. As soon as employees do not understand the goals and benefits of the project, they do not fully support it. In extreme cases, this can even lead to acceptance problems as employees might develop reservations with regard to new technologies. These challenges can be addressed through successful change management. In this context, the fifth step of the nine phases of the digital procurement implementation scheme refers to the digital procurement system evaluation and selection. In particular, this contains the identification of relevant digital procurement IT systems and applications. The goal of this step is to create a list of relevant digital procurement IT systems that serves as a basis to analyze and evaluate them. Based on this analysis, the company can select the respective system. The sixth step refers to the digital procurement system design and development involving the design and adaption of digital procurement IT system and its applications. In addition to the adaption, it is necessary to develop and optimize a company-specific digital procurement IT system and applications. After the development and optimization, data migration and testing and training of the digital procurement system need to be carried out in the seventh step. Thus, the responsible people have to migrate the data to the new system, which then needs to be tested and optimized. An important task in this step of the digital procurement implementation is the staff and supplier training for new digital procurement IT system and applications. In the eight step, the digital procurement system and its applications go live, which means that the system is deployed in the operations environment and thus can be accessed and used in daily business. In this regard, the advantage of a digital

15.5

Summary

625

procurement system over an ERP system is that no complete changeover is required. Instead, it is based on existing systems, which is why the departments of the procuring company and suppliers can gradually accustom to the new system. The final step of the digital procurement implementation scheme is digital procurement system monitoring and audit. Here, a continuous monitoring of the digital procurement IT system and applications is carried out. Furthermore, permanent audits are performed to identify improvement potentials. This phase allows to continually discover optimization potential concerning the implemented digital procurement system. This is known as a continuous improvement process (Peukert and Ghazvinian 2001; Budde 2007).

15.5

Summary

• While traditional procurement is primarily characterized by bilateral systems, digital procurement involves open applications with standardized formats. The lower complexity reduces costs, as open applications with standardized data formats facilitate the integration of new providers and suppliers. • Digital procurement can be defined as the integration of network-based information and communication technology to support operational activities and strategic tasks in the procurement department of a company. • Digital procurement is an integral part of the supply chain. As an integrative approach, supply chain management is the holistic representation of a company’s supplier relationships. Although digital procurement is a subordinate component of supply chain management, it is characterized by structural characteristics that exceed supply chain management. • Procurement goods can be divided according to their specific attributes. A broad distinction can be made between direct and indirect goods. Direct goods are input factors that are combined with other components and thus processed. In contrast, indirect goods have a production-supporting character and are often called MRO goods. • Purchasing situations can be evaluated by means of the evaluation matrix. This matrix differentiates between selective purchasing with low strategic importance and low automation potential, investment purchases with high strategic importance and low automation potential, demand purchasing with low strategic importance and high automation potential, and logistics purchasing with high strategic importance and high automation potential. • The procurement process consists of four overarching phases. These are the analysis, initiation, agreement, and processing/clearing phase. Each phase has its own process that is associated with specific activities. • With regard to the forms of interaction, the use of digital procurement is accompanied by several alternatives concerning the interaction between buying companies and suppliers. The alternatives can be classified according to the (1) typology reflecting the relationship between the participants, (2) the number

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of actors involved, and (3) the ownership of access to the digital procurement system. • Digital procurement provides cost advantages (e.g., through standardized IT systems), time advantages (e.g., through prompt negotiation, authorization, and ordering), quality advantages (e.g., through information transparency), and integrated advantages (e.g., through digital twins). • In a broader sense, the implementation process of digital procurement includes two phases that consist of nine steps. In this regard, the analysis phase serves as a preparation phase of the implementation phase. It consists of (1) the business and product/service analysis, (2) the digital procurement process analysis, (3) the supplier analysis, as well as (4) the definition of a digital procurement master plan/concept. • The actual implementation phase consists of (1) the digital procurement system evaluation and selection; (2) the digital procurement system design/development; (3) the digital procurement system data migration, piloting, testing, and training; (4) digital procurement system running and deployment; as well as (5) the digital procurement system monitoring and audit.

15.5

Summary

Chapter 15 Questions and topics for discussion

Review questions 1. Describe the characteristics of supply chain management and digital procurement and identify commonalities. 2. Outline the suitability of digital procurement by taking into account the strategic importance and the automation potential of various goods. 3. What are the transaction mechanisms of digital marketplaces? 4. Analyze the potential benefits of digital procurement. Then briefly identify potential risks and challenges. 5. Describe the individual phases of the digital procurement implementation process.

Topics for classroom discussion and team debates 1. Discuss whether digital procurement is suitable for every company or whether there are differences in terms of industry affiliation. 2. Debate whether digital procurement leads to a fundamental change of the supply chain. What are the effects of digital procurement on affiliated companies? 3. Discuss whether digital procurement is associated with significant process improvements compared to traditional procurement and whether this will lead to a reduction in personnel. In this context, also analyze the general impact of procurement automation on the job market.

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Digital Business Implementation

16

Contents 16.1

16.2

16.3

16.4

Pre-implementation Analysis Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 1: SWOT Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 2: Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 3: Customer Demand and Preferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 4: Digital Business Strategy Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Implementation Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Step 5: Definition of Digital Business Implementation Model Master Plan . . . . . . . . . . . Step 6: Digital Business Implementation Model Option Selection . . . . . . . . . . . . . . . . . . . . Step 7: Digital Business Implementation Model Design/Development . . . . . . . . . . . . . . . Step 8: Digital Business Implementation Model Pilot Testing and Training . . . . . . . . . . Step 9: Digital Business Implementation Model Deployment . . . . . . . . . . . . . . . . . . . . . . . . . Step 10: Digital Business Implementation Model Monitoring and Audit . . . . . . . . . . . . . Targets of Digital Business Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Business 3+3 Audit and Evaluation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assessment Areas: Design, Process, and Outcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assessment Levels: Company, Digital Business Offer, and Customer . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

630 631 632 632 632 632 634 634 635 636 636 637 639 641 641 643 644

Learning Objectives By working through this chapter, you will be able to: 1. 2. 3. 4. 5.

Describe the pre-implementation analysis phase. Explain the individual phases of the implementation phases. Clarify the three depreciation areas and their mutual influence on each other. Describe the three assessment levels. Identify general target orientations for successful digital business implementation.

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_16

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Developing and designing high-quality and customer-centric digital business offers is a demanding challenge (Madu and Madu 2002). Particularly smaller businesses find it often difficult to provide the resources and competencies required (Papazoglou and Ribbers 2006). In this case, it sometimes makes sense to consider a partnership with other digital business companies or collaborate with respective experts in implementing digital business solutions (Chen 2005; Chaffey et al. 2019). This way, companies can develop and achieve additional economies of scale and synergy advantages with regard to significant cost items and system performance (see for the following Wirtz and Daiser 2015). Independent from the size of the company and the available resources and competencies, successful digital business implementation should generally at least include two important parts: a pre-implementation analysis phase and an implementation phase including a robust audit and evaluation concept. Therefore, Section 16.1 outlines four steps of the pre-implementation analysis phase that serve as a basis for a systematic and well-prepared implementation process. Section 16.2 presents the following six steps of the implementation phase that ends with the digital business audit and evaluation concept based on respective performance indicators.1 Section 16.3 deals with the evaluation and controlling of the business model implementation phase as they hold a key role for successful implementation. Against this background, the 3+3 audit and evaluation system is presented as a business approach that helps to carry out a systematic evaluation and controlling approach.

16.1

Pre-implementation Analysis Phase

Launching a digital business implementation requires a solid base of information. Therefore, the pre-implementation analysis phase is essential and serves as a basis for a systematic and well-prepared implementation process. It is the fundamental backbone of each implementation process and also helps to analyze whether the implementation is worth to be carried out. The pre-implementation analysis phase consists of four steps: (1) a SWOT analysis, (2) benchmarking, (3) the analysis of customer demand and preferences, and (4) the development of a digital business strategy concept. Figure 16.1 illustrates the pre-implementation analysis phase.

1

See for the following chapter also Wirtz (2018b).

16.1

Pre-implementation Analysis Phase

Pre-Implementation Analysis Phase

1

SWOT Analysis

Benchmarking with Best2 Practice Digital Business Implementation

3

4

631

• Analysis of strengths & weaknesses of current digital business offer • Analysis of opportunities of & threats to digital business offer • Creating an integrated concept of SWOT

• Selection of best practices of comparable digital business offers • Benchmarking analysis of digital business offers based on key performance criteria • Development of lessons-learned concept

Analysis of Customer Demand and Preferences

• Analysis of customer demand & preferences through interviews & online surveys • Evaluation of current digital business as well as expectations & future demands • Establishing a concept of market demand & customer preferences

Digital Business Strategy/ Concept Development

• Integration of SWOT results, best-practice insights & customer analysis into a digital business concept • Potential assessment of shifting offline to online service provision & design of future strategy • Deriving target states with milestone plan for implementing & establishing an integrated implementation plan

Fig. 16.1 Pre-implementation analysis phase. Source: Wirtz (2015b)

Step 1: SWOT Analysis In the first step, digital business service providers need to develop a clear understanding of the strengths and weaknesses as well as the opportunities and threats (SWOT) with regard to their existing digital business offer or solution.2 The general procedure starts with the environmental and company analysis, which can be presented in a matrix that contrasts the respective strengths and weaknesses as well as the opportunities and threats of a digital venture. Various strategic consequences can then be derived from the combination of the analyses. For this reason, they need to perform a related analysis from both an internal view and from an external expert perspective that includes the customer view. The results of these two angles of analysis are then combined into an integrated concept that includes the strengths and weaknesses as well as the opportunities and threats of a digital business.

2

For more information on SWOT analysis, see also Chapter 12.

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Step 2: Benchmarking The second step of the digital business roadmap development serves to compare existing digital business services, processes, and performance with best practices from other digital business approaches in order to identify further optimization potential for the present digital business offer. At first, it is important to select best practice digital businesses in order to analyze, compare, and evaluate them based on particular predefined performance criteria in the second step. The criteria can be derived from given best practices and the expectations of company owners or top management. In this context, the company should select similar digital business firms or offers to ensure comparability. At last, this step entails the development of a lessons-learned concept that summarizes the findings, implications, and conclusions for the own digital business offer.

Step 3: Customer Demand and Preferences The third step is the analysis of market demand and customer preferences. The key task of this activity is creating a concept that summarizes current and expected needs. To get this information, companies need to survey customer demand and preferences by means of analytical approaches such as interviews, benchmarking, and online surveys. Here, it is not only important to explore the current situation but also to gather information about future expectations and demand. To achieve success through new digital business approaches based on specific customer preferences, companies need a multifactorial preference analysis and forecasts in quasi-real-time manner. Only those who correctly assess the market of locally differentiated preferences can increase profitability and control customer demand. With the right approaches, companies are able to adapt their strategy to specific preferences and thus maximize future success by accurately forecasting demand.

Step 4: Digital Business Strategy Concept Having finished the third step, the company can start to develop their digital business strategy or concept. The key target of this set of activities is to achieve a target state for the digital business system with a clearly defined implementation concept and action plan. For this purpose, the company has to integrate the results of the previous steps (strengths and weaknesses analysis, best practice insights, user needs, and requirements) into a basic digital business concept that reflects the future strategy.

16.2

Implementation Phase

The second major phase addresses the implementation process and comprises the following six steps: (5) definition of digital business implementation model master plan, (6) digital business implementation model option selection, (7) digital business implementation model design/development, (8) digital business implementation model pilot testing and training, (9) digital business implementation model deployment, and (10) digital business implementation model monitoring and audit. Figure 16.2 illustrates the implementation phase with its six steps.

Implementation Phase

16.2

Implementation Phase

633

Definition of 5 Digital Business Implementation Model Master Plan

• Integrated digital business model analysis (first four steps) & definition of final business model system & process requirements • Design of the new digital business master plan/concept based on the strategy

Digital Business 6 Implementation Model Option Selection

• Evaluation of digital business IT systems & applications, identification short list • Final selection of digital business model IT system & applications • Defining implementation roles & responsibilities

Digital Business 7 Implementation

Model Design

• Design & adaption of digital business IT system & applications • Development and optimization of company-specific digital business IT system & applications • Development of a detailed roadmap & determination of implementation milestones

Digital Business Implementation 8 Model Pilot Testing & Training

• Migration of data to new digital business IT system & applications, pilot testing & optimization • Staff & supplier training for new digital business IT system & applications • Lead-user tests, collection of findings from user feedback, employee feedback

Digital Business 9 Implementation Model Deployment

• Running & deployment of digital business IT system & applications • Enhanced monitoring of the digital business model implementation • Improved first-phase support

Digital Business Implementation 10 Model Monitoring & Audit

• Continuous monitoring of digital business IT system & applications, audit of improvement potentials/ redesign activities • Monitoring & controlling of customer access data, user feedback & complaints • Continuous audit of digital business profitability indicators & continuous improvement of digital business offer

Fig. 16.2 Implementation phase. Source: Wirtz (2015b)

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Step 5: Definition of Digital Business Implementation Model Master Plan In the implementation phase, the developed target concept is transferred to the reality of the company. Various problems can arise in the process, which can lead to the failure of implementation. For example, it can happen that individual managers do not recognize the benefits of the project or prefer alternative concepts. This can be caused by a lack of strategic orientation of management, which uses digital approaches as an isolated tool and thus promotes traditional departmental thinking. Therefore, an integrated digital business model analysis (first four steps) is required, and findings are set to define the final requirements of the business model process. Against this background, the design of the new digital business master plan is derived and a respective strategy is set. If changes to work flows and employee tasks are only made after implementation, the positive effects of the project are delayed. In addition, poor internal corporate communication can lead to employees not understanding the goals and benefits of the project and therefore not fully supporting it. In extreme cases, this can even lead to a problem of acceptance if employees develop reservations about the new technology. These challenges can be met through successful change management. The preparations for implementation by means of the analysis create the basis for starting the actual implementation of the new digital system

Step 6: Digital Business Implementation Model Option Selection In this context, the sixth step of the ten steps of the implementation roadmap refers to the evaluation and selection of the digital system. This step includes the identification of relevant IT systems and applications by evaluating different digital business IT systems and applications. The aim here is to compile a list with a narrow selection of IT systems and applications for the project, which serves as a basis for the analysis and evaluation of the same. Based on this analysis, the company can then select a suitable system. Based on the definition of the project master plan, the software products available on the market are to be checked for their fit with the company’s situation. For this purpose, the implementation project team should compare the solutions offered on the basis of weighted criteria. These criteria can include, for example, implementation and maintenance costs, compatibility with internal and external company interfaces, usability, as well as experience and references of the manufacturer. The selection of the criteria is strongly influenced by the specific requirements of the companies. As a result, the most suitable system is selected for use.

16.2

Implementation Phase

635

Step 7: Digital Business Implementation Model Design/Development The seventh step relates to the design and development of the digital project. This step includes in particular the design, setup, and optimization of company-specific IT systems and applications. The focus is on the integration of the required interfaces and data formats. It therefore must be clarified which requirements are already fulfilled by the system or can be acquired as an additional module and which requirements need individual adjustment. The next task of this step is to derive target states with a milestone plan for implementation. Finally, the company has to establish an integrated implementation plan. Figure 16.3 presents an exemplary digital business implementation plan. The technical design step aims at establishing the technical plan that represents the formerly defined conception. In the pilot step, the initial prototype of the digital business concept is developed. Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Q3 2023

Project management Conceptual design Technical design Pilot Rollout

Go-live

After go-live support Closing

Fig. 16.3 Exemplary digital business implementation plan. Source: Wirtz (2013a, 2020b)

After having successfully tested the prototypes, the company duplicates or transfers the pilot project to other parts of the company. The go-live specifies the point in time when the new system becomes activated. The after go-live support is a specific time period during which special support is available to the employees. The closing determines the official end of the project upon project completion.

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Step 8: Digital Business Implementation Model Pilot Testing and Training After the development and optimization of the system, the eighth step is the data migration, pilot testing, and training. Accordingly, the responsible individuals must migrate the data to the new system, which then must be tested and optimized. An important task in this implementation step is the training of the personnel and suppliers with regard to the new IT systems and applications. It is important to incorporate all stakeholders such as the staff and suppliers of the new digital business IT system and applications. Moreover, the customer experience must be evaluated. Thus, lead-user tests can bring valuable insights. It is important to incorporate findings from user feedback and employee feedback on the new digital system. In contrast to step three, it is now possible to see the result of the new approach. In order to be successful, the digital business approach is supposed to address specific customer preferences. Therefore, it is important to test whether the multifactorial preference analysis and forecasts hold true in a quasi-real-time manner. The pilot helps to assess the market response and allows to check locally differentiated demand. With the testing it is possible to adapt the strategy to specific customer preferences and thus maximize future success by accurately forecasting demand.

Step 9: Digital Business Implementation Model Deployment In the ninth step, the digital business model and its applications are put into live operation, which means that the system is used in the work environment and can be accessed and used in everyday business. This step is also known as go-live. The advantage of a digital product over an analog system at the go-live is that it is based on existing systems and does not have to be introduced by complete changeover. Instead, corporate departments can be gradually involved in its use. The experience gained from the partial implementations increases the manageability of the overall process and thus the chances of success of introducing the digital approach. Accordingly, it makes sense to first start a pilot project and then to connect further departments to the new system in a phased rollout.

16.2

Implementation Phase

637

Step 10: Digital Business Implementation Model Monitoring and Audit The last step of the implementation scheme concerns the monitoring and control of the system. Here, the IT system and its applications are monitored continuously. In addition, regular audits are conducted to identify potential for improvement. This step allows continuous identification of optimization potential in relation to the implemented system. These activities have to go hand in hand with the continuous improvement of the digital business service. In this context, the digital business strategy audit indicators represent a decisive monitoring tool that the company has to apply continuously to improve their digital business offer. In particular, they have to calculate and observe digital business probability indicators. Furthermore, the company also has to examine to what extent the previously defined and implemented strategies have the desired effect. Thus, the digital business strategy audit indicates the effectiveness of the implemented digital business strategies and finds possible weak points or potential for improvement. When applied in conventional companies, digital business-related entrepreneurial activities must meet fundamental financial goals in terms of profit, revenue, earnings before interest and taxes (EBIT), cash flow, return on investment (RoI), and increase in company value. The overall objective of all digital business activities is therefore to ensure long-term profitability of the digital business company in order to permanently satisfy the financial interests of the shareholders. To evaluate and monitor the contribution of the implemented digital business strategy, different profitability and performance measurements are helpful. The last step is of special importance as it aims at the long-term success of the project. Many projects fail due to their lack of long-term monitoring and controlling. Therefore Section 16.3 presents a robust and systematic digital business audit and evaluation system. The entire ten steps of the digital business model implementation plan consisting of the two phases—pre-implementation and implementation—are presented in Fig. 16.4.

Benchmarking with Best-Practice Digital Business Implementation

SWOT Analysis

Pre-Implementation Analysis Phase

Digital Business Strategy/Concept Development

Digital Business Implementation Roadmap

10

• Running & deployment of digital business IT system & applications • Enhanced monitoring of the digital business model implementation • Improved first-phase support • Continuous monitoring of digital business IT system & applications, audit of improvement potential/redesign activities • Monitoring & controlling of customer access data, user feedback & complaints • Continuous audit of digital business profitability indicators & continuous improvement of digital business offer

Digital Business Implementation Model Deployment

Digital Business Implementation Model Monitoring & Audit

Fig. 16.4 Ten steps of the digital business implementation roadmap. Source: Wirtz (2015b, 2018b)

Implementation Phase

9

• Migration of data to new digital business IT system & applications, pilot testing & optimization • Staff & supplier training for new digital business IT system & applications • Lead-user tests, collection of findings from user feedback, employee feedback

• Design & adaption of digital business IT system & applications • Development & optimization of company-specific digital business IT system & applications • Development of a detailed roadmap & determination of implementation milestones

• Evaluation of digital business IT systems & applications - identification short list • Final selection of digital business model IT system & applications • Defining implementation roles & responsibilities

Digital Business Implementation Model Pilot Testing & Training

Digital Business Implementation Model Design/Development

Digital Business Implementation Model Option Selection

• Integrated digital business model analysis (first four steps) & definition of final business model system & process requirements • Design of the new digital business master plan/concept based on the strategy

• Integration of SWOT results, best-practice insights & customer analysis into a digital business concept • Potential assessment of shifting offline to online service provision & design of future strategy • Deriving target states with milestone plan for implementing & establishing an integrated implementation plan

• Analysis of customer demand & preferences through interviews & online surveys • Evaluation of current digital business as well as expectations & future demands • Establishing a concept of market demand & customer preferences

• Selection of best practices of comparable digital business offers • Benchmarking analysis of digital business offers based on key performance criteria • Development of lessons-learned concept

• Analysis of strengths & weaknesses of current digital business offer • Analysis of opportunities of & threats to digital business offer • Creating an integrated concept of SWOT

16

8

7

6

Definition of Digital Business 5 Implementation Model Master Plan

4

3 Analysis of Customer Demand and Preferences

2

1

638 Digital Business Implementation

16.2

Implementation Phase

639

Targets of Digital Business Implementation The success of the entire implementation process is based on a variety of different factors and determined by the achievement of various targets. There are eight central targets, i.e., target orientation, a suitable project team, sensitive culture orientation, top-down management support, a supportive change management strategy, respective training and practice, an inclusive open innovation approach, and finally, an adequate equipment of resources. Target orientation refers to the notion of having all implementation approaches in line with a clear digital business target, which is concrete and feasible. A suitable project team incorporates individuals with the right digital business competencies who work together efficiently and effectively. Culture orientation stands for an implementation approach that is well aligned with the company culture. It is important that all individuals involved respect and care for cultural aspects of the company. Top-down management support refers to the notion that the implementation project receives backing from the top management, which means that decisions to promote implementation are supported by the senior management. Another success factor is the existence of a substantial change management plan. It is vital that all changes linked to the implementation project are considered and followed up by a changed management strategy. Another important factor is the training and practice of all employees affected. New projects require well-trained staff as well as sufficient space and time to become acquainted with the new process and technologies. Another component is the open innovation approach of the project. The implementation project is supposed to incorporate all stakeholders. This can be achieved by strategic involvement of external and internal creative sources. Such approach will bring advantages to the project as it benefits from new ideas and gains stakeholder support. Finally, it is important that the project has access to an adequate pool of resources. The implementation project must be equipped with a suitable budget and sufficient resources in terms of time and people involved. Figure 16.5 outlines the eight central targets of digital business implementation.

Fig. 16.5 Targets of digital business implementation

• Existence of a substantial change management plan • Changes linked to the implementation project are considered and followed up by a change management strategy • …

• The implementation project does not clash with the company culture • Cultural aspects of the company are well-respected by all individuals involved • …

• All employees affected are trained for the changes that come with the digital business project • There is sufficient space and time for practice • …

Training/ and practice Community Network Quality

Culture orientation System Quality

• The implementation project incorporates all stakeholders • External and internal creative sources are involved to benefit from ideas and gain stakeholder support • …

Open innovation approach

• The implementation project must be equipped with an adequate budget • There must be sufficient resources in terms of time and people involved • …

Adequate resources

• The implementation project receives backing from top management • Decisions to promote implementation are supported by the senior management • …

Top-down management Information Quality support

16

Change management Service Quality

• The responsible team incorporates individuals with the right digital competencies • Involved individuals work together efficiently and effectively • …

• Implementation approaches are in line with a clear digital business target • This target is concrete and feasible • …

Targets of digital business implementation

Project team Usefulness

Target Easeorientation of Use

640 Digital Business Implementation

16.3

16.3

Digital Business 3+3 Audit and Evaluation System

641

Digital Business 3+3 Audit and Evaluation System

The implementation project is often linked to substantial changes in multiple areas in a company. Therefore, many changes will trigger other adjustments and potentially also internal disorder. Many aspects of later complications will only be visible after finalizing the implementation. Therefore, the last step of the implementation process—monitoring and audit—is of special importance as it aims at the long-term success of the project. Many projects fail due to a lack of long-term monitoring and controlling. The following section therefore outlines a systematic approach of deploying a respective monitoring system. The audit and evaluation of a digital business venture principally refers to a systematic and transparent way of assessing the performance of all associated digital business activities. This approach is embedded in a continuous improvement circle that focuses on constantly enhancing the overall digital business system. The umbrella guideline for this activity is the entire value chain workflow of the digital business service creation process—from initial concept to final implementation and operation. To obtain a comprehensive picture of the digital business situation, it is reasonable to divide the audit approach into its two main components of evaluation: assessment areas and assessment levels. While the assessment areas seek to control the digital business system from a workflow and performance perspective, the assessment levels look at the different digital business layers. All assessment areas and levels are consistently examined from both perspectives, which allows a holistic assessment of the entire digital business system and its value chain.

Assessment Areas: Design, Process, and Outcome There are three digital business assessment areas, i.e., design, process, and outcome, which looked at from a continuous improvement view influence each other through systematic feedback circuits. Although the sequence of these three areas is generally linear, gaps or discrepancies identified during the evaluation process may modify prior areas (see Fig. 16.6).

642

16

Digital Business Implementation

3 Assessment Areas

1. Design

2. Process

3. Outcome

3 Assessment Levels Level

Key indicators • Cost-benefit ratio 1. Company

• Resource allocation • Competence portfolio •… • Service range

2. Digital business offer

• User/Customer conversion rate • User/Customer base growth rate •… • Awareness

3. Customer

• User/Customer satisfaction • User/Customer recommendation •…

Feedback circuit

Fig. 16.6 Digital business 3+3 audit and evaluation system. Source: Wirtz and Daiser (2015)

Design deals with those aspects related to the development and the intended aims of the digital business approach. This means that the auditor has to evaluate, for instance, whether the digital business approach pursues the right goals, whether the digital business service suits the overall digital business targets, as well as whether the design of the digital business concept supports the achievement of objectives and particularly whether the digital business approach is still up to date and maintained in an adequate manner. The process assessment area covers the aspects of the digital business approach related to the technical realization and service creation in logical continuation of the design assessment area. Here, the auditor evaluates whether the technical execution or implementation of the digital business approach—usually an app or a website—and the service creation process fulfill the initially defined conceptual requirements and anticipated developments. In the case of discrepancies, the result of the process evaluation may affect the design area if modifications are required.

16.3

Digital Business 3+3 Audit and Evaluation System

643

The outcome assessment area deals with the performance of the digital business service provision as well as the fulfillment of supply-driven and demand-driven success factors. For this purpose, the auditor evaluates the actual performance of the provided digital business services from both a customer and a provider perspective, checking whether they adequately fulfill the corresponding success factors or not. Again, if the company identifies outcome gaps between the actual and the desired digital business state, this may modify the design or process assessment areas.

Assessment Levels: Company, Digital Business Offer, and Customer Moreover, the company needs to examine the three assessment levels: company, digital business offer, and customer. These are set up in terms of a dependent layer structure, meaning that the company level may influence the level of the digital business offer, which in turn may affect the customer level and vice versa through the respective feedback circuits. The company level serves to evaluate digital business performance from an organizational view. Therefore, the company has to control important company performance indicators according to the design, process, and outcome logic of this level, including the cost-benefit ratio of the implemented digital business concept, the resource allocation between offline and online service provision, and the available competency portfolio. The digital business offer level refers to directly measurable indicators of the app or website level. Key performance indicators are, for example, the service range that shows the depth and breadth of the services provided, the conversion rate of visitors to digital business customers, or the growth rate of the visitor base. These indicators are particularly important since they directly refer to the goal of shifting customers from the offline to the online environment and thus to the overall aim of increasing customer value. The great thing about measuring these indicators is that companies can collect the relevant data straightaway from the app or website. The evaluation on the customer level is more elaborate and complex, which makes it generally more expensive since companies can only partly capture the respective performance indicators from the digital business offer. Crucial indicators for this layer are, for example, awareness, customer satisfaction, and recommendation. Awareness is the primary step to attract visitors to the online offer. If they are satisfied with the services, they may turn into regular customers. In this context, customer recommendation is a valuable asset that again fosters awareness. Collecting these data usually requires additional surveys such as interviewing customers or carrying out user panels in order to get evaluable information with regard to these indicators. However, this effort is unavoidable since this knowledge constitutes an elementary part of customer-oriented service provision. To sum up, evaluating a digital business approach is an ambitious task that demands profound auditing expertise, technical knowledge, and managerial

644

16

Digital Business Implementation

experience because the procedure requires thorough examination of all activities associated with digital service provision. In addition, some performance indicators may be tacit in nature, which sometimes makes measurement difficult. Irrespective of this difficulty, the management needs to elaborate adequate ex ante and ex post comparisons for system evaluation and justification, which makes digital business auditing and evaluation an indispensable activity in digital business management. However, systematically examining the three assessment areas (design, process, and outcome) as well as the three assessment levels (company, digital business offer, and customer) provides a clear guidance for a digital business audit or evaluation. Apart from that, considering digital business implementation in general, one can learn much by comparing and benchmarking existing digital business approaches.

16.4

Summary

• A successful implementation of digital business should generally comprise at least two important parts: the pre-implementation analysis phase and the implementation phase including a robust audit and evaluation concept. • In the first step, providers of digital business services must perform an analysis (SWOT) from both an internal and external points of view that include the customer view. The second step is designed to compare existing digital business services, processes, and deliverables with best practices from other digital business approaches in order to identify further optimization potential for the current digital business offer. • The key task of the third step is to create a concept that summarizes current and expected customer demand and preferences. The fourth phase then combines the results of the previous three phases into a basic digital business concept. • In the implementation phase, the developed target concept is transferred to the reality of the company. An integrated digital business model analysis (first four steps) serves to define the final requirements for the business model process. In step five, the draft of the new digital business master plan is derived and a corresponding strategy is determined. • The sixth step refers to the evaluation and selection of the digital system including the identification of relevant IT systems and applications by evaluating different digital business IT systems and applications. The aim is to compile a list with a narrow selection of IT systems in order to then select a suitable system. • Step seven includes in particular the design, setup, and optimization of companyspecific IT systems and applications. The step also includes the derivation of target states with a milestone plan for implementation. Finally, an integrated implementation plan must be created. • Step 8 is dedicated to data migration, pilot testing, and training to successfully implement the system. Therefore, it is necessary to involve all relevant stakeholders. Furthermore, findings and user feedback from this step should be incorporated into the new digital system.

16.4

Summary

645

• In the ninth step, the digital business model and its applications are put into practice, i.e., the system is used in the working environment. It makes sense to start with a pilot project and then to connect further departments to the new system in a step-by-step rollout. • The last step of the implementation process—monitoring and audit—is of particular importance as it aims at the long-term success of the project and needs a systematic approach in deploying a respective monitoring system. • Therefore, the audit approach is divided into two main components of evaluation: assessment areas and assessment levels. • Targets of a successful implementation process particularly include target orientation, a suitable project team, sensitive culture orientation, top-down management support, a supportive change management strategy, respective training and practice, an inclusive open innovation approach, and finally, an adequate equipment of resources.

646

16

Digital Business Implementation

Chapter 16 Questions and topics for discussion

Review questions

1. Explain all four phases of the pre-implementation analysis phase. 2. Describe all of the six implementation phases. 3. Name some key targets of a successful digital business implementation. 4. Describe the three assessment areas and the associated feedback loops. 5. Explain the three levels of assessment and identify relevant key indicators.

Topics for classroom discussion and team debates

1. Discuss whether an implementation phase always requires a pre-implementation analysis phase. What are the advantages and disadvantages of a pre-implementation analysis phase for successful implementation? 2. Discuss whether the five phases of implementation must necessarily be carried out in the described manner and which are particularly important for ensuring implementation success. 3. Discuss to what extent the 3+3 system covers all relevant monitoring and audit areas that are important for implementation and whether, in your opinion, relevant ones are missing.

Part IV Digital Case Studies

Google/Alphabet Case Study

17

Contents 17.1

17.2

17.3

17.4

17.5

Google’s Organizational History and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Idea and First Steps of Google 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Extension by Various Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of Revenue and Net Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Google’s Integrated Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Google as an Internet Gatekeeper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Competencies and Resources of Google . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Google’s Business Model Development in a Temporal Context . . . . . . . . . . . . . . . . . . . . . . . Development of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Google’s Market Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Analyses and Structure of Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Characteristics of Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analysis of Actual Situation and SWOT Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Specification of Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduction of Strategic Courses of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determination of Crucial Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decision on Strategic Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduction of Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Google Case: Questions and Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Questions, Key Aspects, and Hints for Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solution to Question 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solution to Question 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solution to Question 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solution to Question 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_17

650 650 651 652 653 653 655 656 662 663 663 665 665 665 668 668 669 669 669 670 670 670 672 674 676 676

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17

Google/Alphabet Case Study

After having established a fundamental understanding of digital business, this chapter deals with applying digital business management within digital business markets, discussing the case of Google as an outstanding digital business company.1 Google is a worldwide Internet software corporation and market leader in the area of online search and text-based online advertising. Headquartered in Mountain View, California, Google became well known through its self-named search engine Google. Nowadays, the search engine is available in 149 languages and has more than 180 domains. According to Google, their search engine covers three times the amount of information provided by other search engines. Section 17.1 highlights Google’s organizational history and development. Section 17.2 provides insights into Google’s integrated business model. Section 17.3 presents Google’s market environment and its most important competitors. Finally, concluding questions offer a deeper examination of the case study at hand, and respective hints for solutions provide suitable guidance.

17.1

Google’s Organizational History and Development

In 1998, Lawrence Edward Page and Sergey Mikhaylovich Brin founded the corporation Google while attending Stanford University. Initially, they participated in a research project about data mining and developed a search engine called BackRub, the precursor of the search engine Google. At this time, BackRub was the only search engine that was capable of analyzing cross-references of a website. Despite receiving recognition from academic society, Page and Brin were not able to find an Internet portal that was willing to use the search engine.

Idea and First Steps of Google 1998 Therefore, Page and Brin founded Google Inc. on September 7, 1998. As seed capital, they resorted to 1.1 million USD collected from family and friends. In addition, they received venture capital funding from Andreas von Bechtolsheim, the co-founder of Sun Microsystems. On Google’s day of foundation, the corporation also launched the trial version called Google Beta. A few months later, the soon to be prospering organization moved its five employees into their first office in Palo Alto, Silicon Valley, close to Stanford University and their present headquarter. Already in February 1999, Google had eight employees and 500,000 search requests per day. In September 1999, Google established a partnership with AOL and Netscape. As the number of search requests per day increased to three million, they finalized the testing phase.

1

See for the following chapter also Wirtz (2019, 2020b).

17.1

Google’s Organizational History and Development

651

Extension by Various Services After officially finishing the test phase, Google concentrated on broadening its range of services. In June 2001, the Google search engine gained market leadership with one billion pages stored by the Google Index. Already by the end of the year 2001, Google recorded more than three billion page views. In the course of expanding their service chain, Google took over Blogger.com in February 2003. Moreover, in the year 2004, Google offered a free email service called Gmail. As part of its expansion strategy, Google acquired the world’s leading online video portal YouTube for 1.8 billion USD at the end of 2006. One year later, Google bought the company DoubleClick for 3.1 billion USD. With this acquisition, Google gained access to DoubleClick’s competency in graphic design of advertisement on websites and to its well-established and well-financed customer base. Ever since its foundation, Google has been expanding its operations and service spectrum continuously. The 4C-net business model typology provides an analytical framework to classify Google’s services. This typology is used for classifying business models on the Internet, comprising the following dimensions: content (compilation, display, and provision of content on own platforms), commerce (initiation, negotiation, and/or settlement of business transactions), context (classification and systematization of the information that is available on the Internet), and connection (creation of information exchange in networks). Within the area of context, services such as Google Image Search, Google Toolbar, Google Book Search, and Google Scholar exist. Likewise, the services Google Mail, Google Voice, and Google Person Finder are part of the connection segment. Regarding the commerce segment, Google AdWords, Google Pay, and Google Product Search constitute an important supplement to Google’s services. Lastly, Google Groups, Google News, Google Maps, and Google Earth represent services in the content area. Overarching this typology, there are services that correspond to more than one section like YouTube. At the end of 2007, the Open Handset Alliance (OHA) was founded, aiming to develop open standards for mobile devices, especially Android, an open-source mobile phone platform. This alliance includes members from various network providers (T-Mobile, Telefonica), software companies (eBay), manufacturers (Samsung, LG), marketing service providers, and companies from the semiconductor industry (Texas Instruments, Broadcom, Nvidia). At the same time, Google expanded its operations in the mobile phone industry and was able to align already existing services with the upcoming mobile segment. Consequently, the Android market offers manifold mobile applications like those from Google but also from many other providers and software developers. The mobile market became increasingly more important for Google’s strategic positioning. Google’s acquisition of Motorola’s segment called Motorola Mobility for 12.5 billion USD in 2011 highlighted the importance of gaining access to the mobile market. This acquisition granted Google access to one of the largest portfolios of patents within the mobile sector, especially to capacities to produce smartphones based on Google’s operating system Android. In the third quarter of 2011, Android dominated the market with a market share of 52.3% and with approximately 180 million devices sold. At this point in time, Google had a broad range of services at its disposal.

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Google/Alphabet Case Study

Nevertheless, changes took place in Google’s top management. In April 2011, Larry Page replaced Eric Schmidt and took over as Google’s CEO, while Eric Schmidt became executive chairman of the board of directors. Because of a simultaneous strategic modification, Google started to reduce its spectrum of services in order to focus on those segments most efficient in terms of costs and benefits. Hence, Google removed 20 services from their offers including, among others, Google Notebooks and Google Desktop.

Development of Revenue and Net Profit Since Google’s initial public offering in 2004, it has tremendously grown and developed. Within a few years, Google evolved from a startup company to the largest Internet service provider worldwide. Nowadays, Google has around 102,000 employees and an additional 121,000 contract workers and is the market leader in the areas of online search and text-based advertisement. Due to the high name recognition of its identically named search engine, Google has become an established worldwide brand. This development is reflected in Google’s increasing revenue and profit. The increasing diversification of its portfolio eventually led Google to found an umbrella company called Alphabet on October 2, 2015. Now, Alphabet serves as a multisector holding that allows its subsidiaries to act more freely than within one company, which was necessary for Google to stay fast and innovative. In 2019, Google generated a revenue of 161.8 billion USD and achieved a year-on-year increase in revenue of 18%. Figure 17.1 represents the development of Google’s revenue and net profit since the year 2004. Revenue and Profit in Million USD 180 161.86 160

136.76

140

120

110.8

100

90.27 75.04

80 65.98 59.24

60

51.41 37.9

40

34.23

29.35 21.8

23.64

16.59

20 3.19

0.4

6.14 1.47

10.61 3.08

4.2

4.29

6.48

10.25

10.25

10.78

12.92

14.44

16.88

21.49

24.98

28.71

0 2004

2005

2006

2007

2008

2009

2010

2011 Revenue

2012

2013

2014

2015

2016

2017

2018

2019

Profit

Fig. 17.1 Development of Google/Alphabet’s revenue from 2004 to 2019. Data source: GoogleWatchBlog (2018) and Li (2020)

17.2

17.2

Google’s Integrated Business Model

653

Google’s Integrated Business Model

Even though the holding cooperation is called Alphabet, its core brand and most of its Internet-related ventures are keeping the name Google, which is why this case study also uses this name, as it focuses on those areas of activity. In the context of e-business models, the classification of Google’s services with the help of the 4C-net business model typology offers insight into the formal structure of the corporation. Although the search engine was previously associated with the context model, its broad service spectrum suggests a highly diversified business structure (Wirtz and Göttel 2014).

Google as an Internet Gatekeeper Therefore, one may categorize Google’s business model as a hybrid business model, as its service range embraces all four dimensions of the 4C-net business model. In order to depict Google’s hybrid business model, a detailed overview of various business model components will be presented. Especially the market supply (competitors, market structure, and value offering/product and services) and the revenue models (revenue streams and differentiation) serve as the foundation for analyzing the business model at hand. In general, Google strategically aims to provide, organize, and systematize existing information worldwide by means of the Internet. With this, Google formulates a clear mission that is an integral part of its corporate strategy and thus also of the respective strategy model (business model mission, strategic position and development paths, as well as business model value proposition). This way, Google grew to become an integrative Internet player and one of the most important gatekeepers of access to information throughout the Internet in recent years. In this context, the term “gatekeeper” describes the opportunity for the operator of a search engine to influence what information users find and can actually access (see Fig. 17.2).

Monetization of Traffic Data and Traffic Flows

Gatekeeper

Google

• Context • Content • Commerce • Connection •… Traffic Data

Efficient CRM Supply Side

Fig. 17.2 Google as Internet gatekeeper of information. Source: Based on Wirtz (2010b, 2020b) and updates

Channel of Traffic Flows from the Demand Services to the Own Supply Services

Traffic Data

Efficient CRM Demand Side

Google Supply

Google … •…

• Listing of Business Information • Local Photos, Opening Hours, etc.

Google MyBusiness

Google Pay • Peer-to-Peer Payments Service • Increasing availability worldwide

Google Analytics • Tracking Traffic on Websites • Reporting Detailed Data

Google AdWords • Online Advertising • Major Revenue Stream Google Products / Shopping • Product Catalog • Paid Listing Service Google Surveys • Customized Market Research • Generating Data for Firms

(Mainly Paid Services)

17

Google … •…

Google Web Search • General Search Engine • 130 Trillion Index Pages Google Maps/Street View/Earth • Local Mapping • Navigation Service Google Drive / Docs / Translate • Cloud Storage • Browser-Based Office Software Google News / Books / Scholar • News • Books/Academia YouTube • Video Plattform • Streaming of Media Content Google Mail/Hangouts/Calendar • Free Mail Service • Call Service / Calendar

Free Services)

User Demand (Mainly

Google as Internet Gatekeeper

654 Google/Alphabet Case Study

17.2

Google’s Integrated Business Model

655

Due to the vast amount of existing information and the recent developments in user behavior, providers increasingly rely on the transparency of the Internet in order to be easily found by all users. Consequently, as one of the largest providers of a search engine, Google drew attention to its growing market power. Google’s value proposition mainly rests upon its gratuitous compilation, organization, and representation of the immense variety of information on the Internet. Importantly, the value proposition remained the same throughout Google’s organizational development and is characterized by a high recognition value and user friendliness.

Core Competencies and Resources of Google Google achieves a higher customer retention through their complementary service offerings. Private users can make free use of email, digital photo or image management, and text processing programs, and they will probably do so repeatedly. Moreover, the high coverage Google promises with regard to advertising purposes attracts business users. From a resource-based view, Google’s manifold competencies and resources are extensive. One major core asset emerges from Google’s highly specialized technological infrastructure that is characterized by its high amount of redundancy, efficient load balancing, and a predominantly softwarebased system. Another core asset is Google’s corporate brand and simultaneous product brand, which have been manifested through the process of creating a generic trademark. This means it became common to use the term “Google” to search the Internet. One essential competence of the company is its comprehensive contextualizing competence. Notable in this respect is the criteria-specific localization, classification, and systematization of the search engine as well as Google’s extension of its services when it comes to illustrating context. Particularly after the year 2004, the company expanded its competencies in content and connection-related areas. This was mainly possible by intensifying business relations and through acquisition activities. Further core competencies of the enterprise are its technological competence, competence at content creation and search, as well as a fully developed competence at promoting advertising efforts. The network model of Google is characterized by a far-reaching cooperation network, as well as an extensive business-to-business and business-to-customer network. The free supply of the Google search engine is particularly important. Google AdSense enables both companies and individuals to add a search box to their own website, giving them a share in profits when other Internet users click on one of the advertisements that appear on the search engine results page. Without an innovative network of business partners and profitable business-tobusiness cooperation, Google would not be as successful and powerful as it is today. Nevertheless, the company has established an extensive network and tremendous user base in the customer area, which especially profited from a digital word-ofmouth effect after the foundation of the company. Users that were happy with the

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search algorithms personally recommended them to family, friends, and acquaintances. Google’s creation of goods and services follows a clear and linear structure. The first step of creating content is to gather, systematize, and classify information in order to save it as results for on-demand inquiries and make them available through the search engine. This content creation process is particularly based on the supply of information from third parties or oneself. In comparison, the connection supply is characterized by a strong interdependency between user interaction and communication management. The company receives most of its input from communities, content suppliers, and news agencies. Therefore, the transmission of information and interaction follows a simple process, i.e., Google checks websites and registered content and either adds them to the index and utilizes them or classifies them as irrelevant and therefore rejects them. Another partial model of Google’s business model is the revenue model. The AdSense partner program generates one of the most important revenue flows, which unlike the AdWords program places context-dependent advertising on an external website. Within this system, the owner of the website receives a certain amount of remuneration when a user clicks on the advertisement. Simultaneously, Google attains more traffic from partner websites. The fees or portion of ad revenues Google pays to such advertising partners that run Google ads or services on their websites are called traffic acquisition costs (TAC). Another fundamental subcomponent of Google’s business model is the market offer model that consists of context, content, and connection offers. The aspects of the company that matter most to industrial customers are the wide-ranging offers of well-developed technical functions and the high number of users. The latter is associated with the great recognition value and the high usage of the search engine. The free usage of various online services offered by Google is highly appealing to private customers. However, the foundation of Google’s business model is still its search engine that offers information via the Internet by means of an intuitive search tool. At this point, Page’s and Brin’s PageRank algorithm evaluates the relevance of the website according to the links it incorporates. The introduction of PageRank revolutionized those search engines that evaluated websites according to their search terms in texts and meta tags. Today, Google includes over 200 different evaluation criteria for the ranking of websites. With the recent update of the search algorithm called “mobilefriendly 2,” Google rolled out another ranking signal boost to benefit mobile-friendly sites on mobile search.

Google’s Business Model Development in a Temporal Context In terms of the 4C-net business model typology, the context model with the search engine as its core service builds the foundation of Google’s integrated business model. Due to a continuous and innovative revision and extension with specialized

17.2

Google’s Integrated Business Model

657

search services for images, news, and geographic information, Google is the most frequently used search engine worldwide. Further services within the context segment are, for example, Google Images, Google Toolbar, Google Book Search, Google Scholar, Google Translate, Google Blog Search, Google Home, and most recently Google Assistant and Looker. One of the first services besides the search engine was Google Catalogs that offers users the opportunity to look at different print catalogs online. However, Google turned down this service in August 2015. Google Images allows to search for distinct pictures online by means of special search criteria like color, format, or the right of use. Google Toolbar is a toolbar for the web browser that allows the user to quickly access the Google search engine and other Google services without changing to the main page. Figure 17.3 presents Google’s business model.

Strategy Model

• Interest payments • Profit distribution • etc.

Returns

Financing

Reporting/ Payments

Provision

Acceptance of Website

Reporting of Website

…

Ad Space Keyword Advertising

…

Google Fi

Connection Gmail or Google Mail Google+

…

Google Translator

Content Google Maps Google YouTube

Competencies/Resources Model

Placement/ Integration

User interaction

Provision of Content

Performance

Network effects Virtual word of mouth Cooperation Partner programs

Network Model

• Advertisement • Usage of technologies

Revenue

• Customer input • Exchange

Interaction

• Presentation • Distribution

• AdWords customers • AdSense partners • Lettings •…

Business Customers

Private Customers

Customer Model

ILLUSTRATIVE EXAMPLE

Fig. 17.3 Google’s business model. Source: Based on Wirtz (2010b, 2020b) and own analysis, estimations, and updates

• • • •

Context Google Search Engine (FullText Search of Documents and Picture Files within the World Wide Web) Google Scholar Google News Google Shopping …

Market Offer Model

Integrated Product/Service Offer

• Specialized technological infrastructure (redundancy ability, load balancing, superior software system) • Preparation, systematizing, collection and provision of data, • Strong brand, deonymization • Contextualizing competence • Technological competence • Content creation competence • Competence of promoting advertising efforts

Management of Advertising Partnerships

Platform Communication Services Management

Creation of Own Content

Collection and Selection of Content

On-Demand Provision of prompt results

Storage

Classification

Systematization of Information

Collection of Information

Value Creation Model

Revenue Model

17

• Organizing and systematizing global presence of information on the Internet and making it accessible to all users

Investors

• News agencies • Content media companies •…

Commercial Content Providers

• Communities • Website operators •…

Private Content Providers

Procurement Model

Google

Customer Relationship Management

Finance Model

658 Google/Alphabet Case Study

17.2

Google’s Integrated Business Model

659

The applications Google Book Search, Google Scholar, and Google Blog Search enable to search the Internet for books, academic publications, or blogs. Google Reader, a web-based feed reader, informs users automatically about new contributions to their favorite homepages. However, Google turned down this service in July 2013. With the takeover of the software producer ITA in 2007, Google expanded its context segment with the analysis of flight information. This feature presents airfares in a comparable way. The user benefits from these various context services in terms of time saving and information procurement. In 2012, Google introduced the service Google Now as an extension of the Google Search App. Google Now is an intelligent personal assistant with voice search and a command feature. In 2016, Google launched its smart speaker Google Home that is able to receive acoustic commands via an integrated microphone and serves the user as personal digital assistant at home. Basically, it transfers the functionalities of the personal assistant Google Now to the home environment and enables the user access to Google services such as Google Play Music, YouTube, or Chromecast via voice commands. Google Now was replaced by Google Assistant in 2017. Another major sector of the market supply is the content segment that is characterized by the provision, preparation, and aggregation of multimedia content. This sector contains services like Google Groups, Google News, Google Maps, Google Earth, Google SketchUp, Google Docs, Google One, Google Discover, and YouTube. Google extended or merged many of the older services in order to offer the user a broader range of services. For example, Google Local was integrated into Google Earth and Google Maps. The first content service was Google Groups. This online service allows users to establish or to search for different groups of interest and to publish own content. Here, the connection aspect is also highly important because the service rests upon the Usenet and therefore offers a foundation for interactive communication. After introducing Google Groups, Google launched a news service called Google News, a platform that automatically creates content in over 35 languages. Google Earth presents a digital globe that uses satellite aerial views and geographical data to create a digital model of the earth. In doing so, it allows users to search for addresses or places and to calculate distances and routes. Moreover, Google SketchUp is a software to construct a three-dimensional model that allows to create pictures and animations. Google Docs is another online service that offers online access to a word processing and table program. The successor to Google Base, Google Merchant Center, allows retailers to deliver product information to Google in order to integrate it into the Google Product Search. The most important content service today is the online video channel YouTube. YouTube enables users to watch, upload, and publish videos. To do so, they can make use of different channels or individual YouTube websites, through which they can use or offer other information besides those videos. The number of companies using this channel for marketing purposes is rapidly increasing. YouTube is the most popular platform for this kind of video material.

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In 2020, YouTube had over 1.9 billion monthly active users worldwide who altogether uploaded more than 400 h of video content to YouTube per minute (YouTube 2020). Recent content offers of Google include Chromecast, a line of digital media players, as well as the virtual reality platform Google Daydream. The services belonging to the connection business model distinguish themselves by allowing to exchange network-based information. In this segment, Google presents itself with services like Blogger, Google Mail, Google Voice, Google Drive, and most recently with the telecommunications service Google Fi, the successor to Google+, the software for internal company communication Google Currents. The social network Google+, for instance, was the consequent attempt to extend Google’s business model in the connection segment. Launched in September 2011, it counted about 3.36 billion registered members in 2017 (Statista 2017a). Google+ incorporated various old and new connection services but still struggled to compete with the largest social network Facebook. In 2019, the service for private users was discontinued and replaced by Google Currents for the corporate sector. With regard to the initiation, negotiation, and settlement of business transactions of the commerce business model, the most important services Google offers are AdWords and AdSense. These two services will be presented later on in the context of Google’s revenue model. In the commerce segment, Google has rather few services to offer. Google’s payment service Google Checkout is primarily used for payment handling in the Android market, whereas its payment service Google Wallet allows users to pay via mobile phone with Near-Field Communication (NFC). This service was discontinued in 2013 and first replaced by Google Wallet and later Google Pay. Google has been extending this segment by product search engines, product presentation, and price comparisons primarily for its services Google Product Search and Google Shopping. Moreover, Google is starting to compete with other classic online retailers, particularly through its service Google Merchant Center. Recently, Google has also acquired FameBit, a leading marketing platform that connects brands to creators for branded content creation. Other services are part of more than one segment at once. For example, the photo community Picasa allowed different users to share their photos worldwide and to interact with one another. In 2016, this service was replaced by Google Photos. Here, Google combines both the content and connection segments in one service. Since 2008, Google has been following business units outside of the 4C-net (content, commerce, context, and connection). For this purpose, it has developed information technologies like the mobile operating system Android, as well as own mobile consumer electronic devices, like the Google Nexus series and its next generation Google Pixel. Recently, Google has also introduced its augmented reality glasses Google Glass and its virtual reality glasses Google Cardboard. Moreover, it has acquired Nest Labs, a producer of smart appliances for home automation, which now works with the Google Home. Figure 17.4 highlights the development of Google’s business model and service offers.

17.2

Google’s Integrated Business Model

661

Alphabet Inc. Waymo DeepMind X Google Calico Nest Chronicle

1998 2001

Google Groups

2002

Google News

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Froogle

Picasa

Google Google Earth Google Maps Video

Google Analytics

You Google Google Tube Finance Trends

Google Apps

Google Docs

Google Street iGoogle View

Google Health

Knol

Google Google Base Calendar

2014

Chromecast

2015

Chromecast audio Google Fotos

2016

Google Daydream

… Business Units Outside the4C Net: Information Technology

Connection

Google Search Appliance

Google Directory

Google Desktop

Blogger

Google Books

Google Scholar

GMail Google Orkut SMS

Google Blog Search

Google Talk

Google Google Google Checkout Notebook Patent Search

Google Product Search Google Insights for Search

Google SketchUp

Google Google Translate FeedBurner Google Google Friend Google Google Google Chrome Connect Cloud ModeratorSites Android Google Squared

Google Places

Google Goggles

Google Google Google Voice Wave Google Latitude URL Shortener Google Buzz Google PersonFinder

Nexus Chrome OS

Google+

Google Google Google Play Google Catalogs Politics & Shopping Elections Google Keep

Verily

Google Toolbar

Google Google Reader Bookmarks

Public Google Google Google Data Explorer TV Dash- Google Street board View Trusted Google Google Google Merchant Google Wallet Centre Arts & Culture Flight Search

2013

Loon

Google Google Catalog Search Images

Google AdSense

Google Local

Wing

Google!

Google AdWords

Google Allerts

Makani

Context

Commerce

Content

GV

Google Now Google Surveys

Google Chromebook Glass Google Google Drive Hangouts Google My Business

Android TV Google Domain Google Home

FameBit

Google Wear OS Cardboard Google Glass (i.E.)

Project Fi

Nexus Player androidauto

Google Google Allo Duo

Google Pixel

Google Google Lens Assistant

2017 2018

Google Google One Discover

2019

Google Stadia

Google Pay

Google Fi Firebase Dynamic Links Looker

Active service

Google Currents

FitBit

Discontinued service

Fig. 17.4 Development of Google’s hybrid business model. Source: Based on Wirtz (2010b, 2020b) and own analysis, estimations, and updates

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Development of Revenue Another central component of Google’s business model is the revenue model through which multiple income streams are introduced and analyzed. The most important revenue streams are advertising revenues generated through integrated advertising solutions and keyword advertising by AdWords. The customer chooses various keywords that describe the product or service advertised, so that these products or services appear in the search resutls. Futhermore the maximum price one has to pay for every click on the advertisement. Combining the cost per click (CPC) with the quality of the keyword or product provides a basis to assess the advertising and thus the priority with which Google advertises it. Moreover, the customer defines a monthly budget and is able to change some settings regarding the networks or languages. Besides the basic search page (google. com), possible advertising networks are Google Search Network and Google Display Network. The Google Search Network contains websites that have licensed Google’s search function as an independent toolbar. The Google Display Network comprises a large number of different websites that disseminate the display advertising. Nevertheless, considerably high costs in the form of traffic acquisition costs (TAC) emerge. Furthermore, Google has expanded keyword advertising also to other services such as Google Product Search and Google Mail. Besides the classic text display, other forms of multimedia like videos or images are also possible. In addition, location data can be integrated to combine the advertising with services like Google Earth or Google Maps. Since the year 2007, Google has also generated considerable revenue from other income streams than advertising, which we will discuss later on. However, Google’s total revenue is mainly composed of advertising revenues that accounted for about 90% of Google’s total revenue in 2017. Figure 17.5 shows the development of Google’s revenue. Revenue in billion USD 180 160

Licensing & other revenues 16%

140 120 100 80

Advertising Revenues 84%

60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Advertising Revenues Google Websites Licences and other Revenues

Advertising Revenues Google Network Members' Websites

Fig. 17.5 Development of Google/Alphabet’s revenue. Data source: Alphabet Inc. (2017, 2020)

17.3

Google’s Market Environment

663

Besides the huge amount of advertising revenues, the second revenue stream originates from royalties for the usage of software, as Google offers various software solutions in the form of fee-based versions with extended usability for professionals. Such programs are, for example, SketchUp Pro, Google Earth Plus, and Google Earth Pro. In this extended version, Google Earth Plus offers the integration of GPS and a program to virtually construct buildings. Moreover, Google sells the server hardware Search Appliance that companies can utilize for their document management and indexation. Google is also active in the mobile market with its smartphones (e.g., Nexus 5X and Nexus 6P) produced by LG and Huawei but only generates comparably low sales revenue in this market. However, according to Google, nexus devices are not primarily intended to drive revenue but are rather an experimental bearer for Google’s innovation for Android (Fortune 2015). Google also receives revenue over the Android market, where developers of fee-based applications earn a transaction fee of 30% on the sales price. According to the highly diversified service spectrum, Google’s revenue streams comprise transaction-dependent and transaction-independent revenues. Figure 17.6 presents these different forms of revenue, showing that Google has various revenue streams that are differently structured. Nevertheless, one always needs to acknowledge the importance of keyword advertising in this context.

Direct Revenue Generation

TransactionDependent

TransactionIndependent

Indirect Revenue Generation

• Hardware sales • Transaction charges on the Android App Market: PlayStore

• Cost per click – Keyword advertising

• Royalties, for example, fees for using extended program packages • AdWords activation fee

• YouTube custom brand channel

• Cost per view – YouTube video ads

Fig. 17.6 Google’s revenue structure. Source: Wirtz (2000c, 2019)

17.3

Google’s Market Environment

Market Share As one of the world’s leading Internet organizations with a broad service range, Google competes with numerous players in different markets. The following section identifies and presents various markets according to their strategic importance for

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Google. The most essential market for the company is the search engine market. This is not only the company’s origin and core business but also accounts for about 70% (more than 90% including the network) of the revenue streams. A market share of about 88% makes Google the most frequented search engine in the United States (StatCounter 2020c). Figure 17.7 depicts the four largest providers of search engines in the United States.

Google

87.71%

Bing

6.99%

Yahoo

3.44%

DuckDuckGo

1.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fig. 17.7 Market share of search engines in the United States in July 2020. Data source: StatCounter (2020c)

One should also pay attention to the fact that the search engine market is part of the superordinate advertising market. Due to the effective search engine marketing, not only the communication quality is important but also the coverage, respectively the number of site views. In this respect, Facebook emerged as one of the most important competitors, gaining more stake particularly in the areas of social advertising and display advertising. Another crucial market is the mobile Internet market in which Google operates as a provider of advertising services and a content provider. Just like in the classic markets, Google positioned itself with the search engine in the mobile segment so that location-dependent search and marketing and services like Google Maps and Google Latitude gained in importance. The market share of Google’s mobile search engine is even higher than that of the classic search engine, accounting for almost 95% in the United States in July 2020 (StatCounter 2020b). Consequently, Google occupies a strong position in the mobile market as well.

17.4

Case Analyses and Structure of Solutions

665

Market Competition However, due to different proprietary systems, the mobile market is highly competitive in terms of classic online advertising. Apple’s marketing platform iAd serves as an example. iAd is able to integrate advertising messages seamlessly into applications and thus operates in the same way as Google’s system AdMob. Moreover, other social networks like Foursquare and Facebook play an important role in the mobile segment and strongly focus on local social advertising offers. With regard to content provision, Apple launched its platform iTunes in 2003, which has quickly become the market leader in this segment and one of Google’s strongest competitors. Thus, iTunes serves as a model company for Google’s Android marketplace that distributes content for the operating system Android. Google further expanded its mobile offers with Google Play Music, a competitive platform to iTunes, using One Pass as a suitable operating system. Due to its high growth rate and market leadership, Android finds itself with about 72% market share in mobile devices (mobile phones, smartphones, tablets) clearly ahead of Apple’s iOS with around 26% market share. Another competitor in the mobile segment is Samsung with a market share of 0.21% (StatCounter 2020a). Besides these core markets, Google constantly aims to enter other markets and enhance its position in the Internet market. Google’s advancements in digital commerce are especially significant. By aggregating product information, Google is increasingly gaining importance as an intermediary in online retailing. Thus, competition among actors like Amazon, Google, and so on is rising. With regard to Google’s presence via YouTube in the classic and mobile Internet, Google competes, for example, with the content aggregator Hulu (Lee 2019).

17.4

Case Analyses and Structure of Solutions

Case studies have their origin in the so-called Harvard Case Studies and are nowadays a commonly applied and widely accepted scientific method within the field of business administration and respective teaching. One particular characteristic of the case study analysis is that there is often no unique solution. Instead, one considers a specific problem and searches for an approximately optimal solution. This characteristic is at the same time the criterion to differentiate the case study analysis from normal exercises that are characterized by right and wrong solutions (e.g., in the field of law). This section defines the meaning of a case study and presents a methodological approach for handling and solving case studies.

Characteristics of Case Studies The case study analysis is a heuristic method and thus a method of self-regulated learning for the respective person that deals with the case study and works out conclusions by means of analyses. Within the scope of this strategy of investigation,

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Google/Alphabet Case Study

one examines a certain phenomenon in the respective and real existing context by using one or multiple objects of study, like individuals, groups, and organizations. The persons dealing with the case study should not be bound by particular methods or limited to a single solution method. Looking at a case study from multiple perspectives generates different approaches to solving a problem but at the same time requires a broad spectrum of different approaches and solution methods. The case study analysis enables to achieve a variety of different goals of learning and teaching. However, the primary focus of interest refers to the connection of theory and practice. Here, one can distinguish, on the one hand, between approaches that apply theories to practice and, on the other hand, approaches that move from practical thinking and procedures to theories. Given the comprehensive approach to the research context and the inductive procedure of case study research, this approach generally refers to qualitative research. The following three characteristics of a case study clarify this closeness to qualitative research (Merriam 1998): • Context-related: the case study focuses on a group or an individual, a program, a phenomenon, or an event. • Descriptive: the final product or result of the case study contains a detailed and multilayered consideration of the object investigated. • Heuristic: the case study does not test already existing hypotheses but rather generates new insights into the object of study, for instance, conditions, consequences, and causal relationships. Since one should consider every case study individually, specific cases cannot be generalized. However, if underlying conditions or characteristics of the objects of study are similar, one can at least partially transfer them. Consequently, the case study approach is particularly suitable when the objective is to look at complex underexplored phenomena in a broad manner and against the background of their dependence on context. The following illustrates a methodological approach for handling and solving case studies. The procedure for approaching case studies usually comprises six steps that build on each other: (1) analysis of actual situation and SWOT analysis, (2) specification of problem, (3) deduction of strategic courses of action, (4) determination of crucial success factors, (5) decision on strategic alternatives, and (6) deduction of recommendations. The first step should aim to analyze the actual situation. A SWOT analysis considers internal characteristics (e.g., strategy, structure, and resources) of the business but also the external general conditions (e.g., market structure, customer, and supplier potential). The second step of the solution method of case studies involves specifying the respective problem. Potential issues, for instance, can trace back to the procurement, production, or corporate strategy. Based on this elaboration of the problem, one can derive strategic courses of action in a third step, for instance, strategies of diversification, cooperation, and market entry.

17.4

Case Analyses and Structure of Solutions

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The fourth step of the solution method of case studies includes determining or defining crucial success factors, before subsequently deciding on the strategic alternatives in the fifth step. In this connection, one examines the courses of action identified, for instance, for specific advantages and disadvantages or their feasibility. The sixth and final step of this approach involves deducing or giving strategic and/or operational recommendations. Figure 17.8 presents an overview of the solution method of case studies.

Steps for Solving Case Studies Internal Analysis

1

Analysis of Actual Situation & SWOT Analysis

• Strategy • Structure • Resources & core competencies • Strenghts/weaknesses • Problems

External Analysis • Market structure • Competitive strategies • Customers • Suppliers and vendors • Regulatory environment • Opportunities/risks

Development of Problem Definition

2

Specification of Problem

• Procurement problem • Production problem • Sales problem

• Organizational problem • Structural problem • Strategic problem

Potential Strategic Courses of Action

3

Deduction of Strategic Courses of Action

• Diversification strategy • Cooperation strategy • Internalization strategy

• Growth strategy • Market entry strategy •…

Derivation and Definition of Crucial Success Factors

4

Determination of Crucial Success Factors

5

Decision on Strategic Alternatives

• CSF method

Analysis of Identified Courses of Action • Advantages • Disadvantages • General feasibility

• Financial feasibility • Contribution of problem solution and goal orientation

Recommendation 6

Deduction of Recommendations

• Strategic recommendations for action • Operational recommendations for implementation and realization

Fig. 17.8 Solution method of case studies. Source: Wirtz (2013d, 2019)

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Analysis of Actual Situation and SWOT Analysis Within the scope of a case study analysis, one can apply the systematics of strategy development to examine the actual situation of a company. An important part of strategy development is analyzing the situation by means of situation analysis (Wirtz 2013b), which comprises analyses of environment, market, competitors, as well as competencies and resources. The competitive analysis and competence-resource analysis merge into an analysis of strengths and weaknesses. This in turn combines with an environment analysis and market analysis to form an analysis of opportunities and risks. The following section explains this procedure. Within a situation analysis, one first examines the environment to describe the general conditions under which the respective company acts. In this connection, the sociopolitical, technical, regulatory, and economic environment plays an important role. After the environment analysis, it is necessary to analyze the industry and market in which the respective company operates particularly the market structure and behavior of the demanding actors. In the next step, one should perform a competitive analysis that aims to identify relevant actual and potential competitors and to examine their behavior on the market. Subsequently, one needs to consider the resources of the competitors. Along with this competitive analysis, one should also investigate the company’s own competencies and resources. This competence-resource analysis needs to take place in much more detail than the competitive analysis and distinguishes between core competencies, complementary competencies, and peripheral competencies (Wirtz 2000g). Core competencies are mandatory resources that the company requires in internalized form to provide products and services. Complementary competencies, by contrast, are necessary resources that can also be provided by cooperation partners. Peripheral competencies refer to resources that are not essential and thus may be acquired from the market. Based on the competitive analysis and the competence-resource analysis, one can analyze strength and weaknesses. Here, the aim is to identify advantages and disadvantages over the most important competitors and hence to derive the respective scope of action. The results of this strength-weakness analysis together with those of the environment and market analysis jointly form an opportunity-risk analysis. In this connection, one compares the external situation with the internal situation of the respective company in order to identify development trends of the environment and the markets at an early stage and, subsequently, to determine whether these future developments pertain to a strength or weakness of the business. On this basis, one can deduce indications of a potential strategic demand for action and use the results to develop the corporate strategy.

Specification of Problem After analyzing the actual situation, one has to specify the respective problem of the case study. This step focuses on identifying all problematic issues of the case study. If, for instance, several problems occur, it is recommended to prioritize them or to form a processing sequence and describe their relationships among each other. When working

17.4

Case Analyses and Structure of Solutions

669

out the basic problems, one may not make the mistake of identifying symptoms as indicators or consequences of an underlying problem as the actual problem, because otherwise it is not possible to achieve adequate proposals for solution. One needs to summarize the symptoms and investigate the reasons behind in order to reveal the causal main problem. In case there are several central issues, one should consolidate them and bring them in order according to their meaning and importance.

Deduction of Strategic Courses of Action After analyzing the actual situation and specifying the problem, one needs to derive strategic courses of action. Based on the case study-specific problem, one first develops different alternative solution approaches, the so-called strategic courses of action. The following evaluation of these options takes place under uncertainty since case studies often do not provide complete information and thus require to make assumptions. Examples of strategic courses of action are strategies of market entry, diversification, growth, cooperation, and internalization. After deriving strategic courses of action, one can determine the key success factors of the business. The following section therefore discusses the procedure of identifying crucial success factors.

Determination of Crucial Success Factors Crucial success factors (CSF) are a small number of characteristics that significantly influence the success of companies. They differ from business unit to business unit because they are affected by both internal and external conditions. CSF need to have a certain minimum characteristic in order to enable the desired degree of goal attainment. The procedure of determining CSF and their application includes not only identifying the CSF but also measuring the degree of goal attainment, as well as making an ongoing target-performance comparison. Besides creating a strategic frame of reference, the CSF method also involves analyzing own objectives in order to identify the CSF afterward. In the following, one needs to develop measuring criteria and determine so-called critical thresholds as standards. Subsequently, one can identify the control quantities and capture occurring changes. Having determined the CSF, one needs to decide on the different strategic alternatives, which is described in more detail in the following section.

Decision on Strategic Alternatives Within the scope of deciding on the strategic alternatives identified, one should first analyze and assess the degree of fulfillment of the CSF for every strategic course of action. Then, one should examine the congruency between business potentials and market-specific requirements by means of strategic fit analysis (e.g., SWOT analysis). Finally, the criteria of feasibility indicate whether the respective company possesses the resources and skills necessary to realize the respective strategic option. The analysis of the individual aspects leads to a so-called strategic evaluation matrix that allows to

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select the best strategic alternative. Based on this evaluation and selection, one can deduce recommendations for action, which is explained in the following section.

Deduction of Recommendations Deriving recommendations involves explicitly verbalizing and presenting the optimal strategic course of action selected with regard to the problem identified earlier. It is then necessary to operationalize the strategic decision and transfer it into specific recommendations for action in order to implement the decision. In this connection, one first needs to demonstrate the concrete measures and necessary consequences of the alternative selected, before adjusting operational action by means of operational measures (who, where, what, when). The last step involves planning the financial realization of the strategic option selected. For this purpose, one needs to plan a detailed budget not only to ensure the actual financing after having analyzed the general feasibility but also to show that the costs are justifiable with regard to the expected benefit.

17.5

Google Case: Questions and Solutions

Questions, Key Aspects, and Hints for Solution Question 1 Discuss Google’s initial situation by means of the SWOT analysis with regard to Google’s current financial circumstances. What kind of problem statement can be deduced? Question 2 Based on this analysis, derive strategic opportunities of action and critical success factors for the management of Google. Name present success factors of Google. Question 3 Reflect upon these potential strategic alternatives and choose the dominant one. Question 4 Discuss various opportunities for Google to differentiate itself in the context of revenue optimization. Which recommendation for action would you give Google? This section hints at solutions to the summarizing questions about the Google case study, following a step-by-step procedure. Against the background of Google’s present revenue situation, the SWOT analysis focuses on and presents Google’s current situation. Based on this analysis, a problem statement can be derived. Then, strategic alternatives and essential success factors are established and critically assessed. Subsequently, several opportunities for revenue differentiation and extension of the service range are discussed and evaluated, finally leading to recommendations for actions for Google. Figure 17.9 offers a schematic overview and describes core aspects, tasks, and hints for solutions with regard to the Google case study.

Deduction of recommendations for action

Decision about strategic alternatives

Illustration of critical success actors

Deduction of strategic alternatives for action

Specification of problem statement

Current situation

Steps

• TASK: Recommendations for action and their justification

• TASK: Development and explanation of diverse diversification strategies

• TASK: Identification of essential success factors

• TASK: Identification of strategic alternatives of action

• TASK: Which alternative revenue streams can be further exploited?

• TASK: SWOT analysis focusing on the present revenue situation

Tasks

• Market-based differentiation

• Analysis of market and competitive situation

• Inclusion of strategy model and resource model

• Awareness of most important competitors

• Analysis of different revenue forms and sources

• Consideration of current market situation

• Focus on market offer model and revenue model

Hints for Solution

Google Case: Questions and Solutions

• Revenue generation needs to be optimized

• Google is already active on distinct future markets

• Google remains unchallenged in its core business but has to diversify its revenue streams in order to diminish potential risks

• Google’s core business must not be influenced

• Google has numerous core competencies that are suitable for revenue differentiation

• The broad range of services offers various opportunities for action

• Besides advertising, Google generates only low revenue

• Google already uses multiple sources and forms of revenue

• The low diversification of revenue streams is a central problem

• The main part of Google's revenue is based on advertising (especially search engine advertising)

• Google is a successful company that offers a broad range of services

Key Aspects

17.5 671

Fig. 17.9 Key aspects, tasks, and hints for solution in the Google case study. Source: Wirtz (2019)

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Solution to Question 1 Discuss Google’s initial situation by means of the SWOT analysis with regard to Google’s current financial circumstances. What kind of problem statement can be deduced? The SWOT analysis framework contains an internal and external dimension. While the internal dimension comprises the strengths and weakness of a business, the external dimension involves its opportunities and threats. Google’s strengths are particularly its dominant position in the online and mobile advertising market including a broad advertising network, as well as its strong position as online and mobile content provider. Further strengths are its very broad range of online services and technological leadership. Among Google’s weaknesses are its missing revenue differentiation and unclear range of services. Moreover, many services have no clear revenue purpose or unexploited revenue potential. Further weaknesses are Google’s varyingly strong positions in different geographic markets and its generally weak position in the social media market. Opportunities for Google lie in the introduction of new or the expansion of existing revenue streams for the current service range or in growing markets. In this connection, promising growing markets are particularly mobile business (e.g., Google Nexus, Google Pixel, Google Duo), social media (e.g., Google Currents), Internet of Things and automation (e.g., Google Home, acquisition of Nest Labs), augmented and virtual reality (e.g., Google Cardboard), artificial intelligence, machine learning, and big data. A further opportunity for Google is the expansion of their market leadership in online marketing. Threats to Google may be its vulnerable revenue monoculture that may pose a high risk through a decrease in advertising revenue (e.g., customer turnover to Facebook), a recession-driven decline, or replacement through other search engine providers (e.g., Bing’s increase in market share). Moreover, Google could experience brand dilution through too many unsuccessful services. The combined consideration of the individual aspects of the internal and external dimensions results in four different basic strategies: SO strategies (strengthopportunity combination), ST strategies (strength-threat combination), WO strategies (weakness-opportunity combination), and WT strategies (weakness-threat combination). Figure 17.10 describes the specific elements of the SWOT analysis adapted to the Google case study.

WO Strategies (Weaknesses-Opportunities Combination)

SO Strategies (Strengths-Opportunities Combination)

• Expansion of market leadership in online marketing

• Introduction of new or extension of current revenue streams on growing markets, particularly the social media (Google Currents), mobile (Android Marketplace, Google Pixel, Google Duo), Internet of things and automation (smart home devices like Google Home, acquisition of Nest Labs), augmented reality and virtual reality (Google Cardboard), artificial intelligence, machine learning and big data markets

WT Strategies (Weaknesses-Threats Combination)

ST Strategies (Strengths-Threats Combination)

• Brand dilution through too many unsuccessful services

• Vulnerable revenue monoculture -> high risk through a decrease in advertising revenue (customer turnover to Facebook), recessiondriven decline or replacement through other search engine providers (e.g., Bing’s increase in market share)

• Introduction of new revenue streams for the current service spectrum

Google Case: Questions and Solutions

• Social media position

• Varyingly strong positions in different geographic markets

• Numerous services without clear revenue purpose or unexploited revenue opportunities

• Unclear range of services

• Missing revenue differentiation (around 85% of revenue comes from advertising)

Weaknesses

• Technological leadership

• Very broad range of online services

• Broad advertising network

• Strong position as online and mobile content provider

• Dominant position in the online and mobile advertising market (particularly through search engine advertising)

Strengths

Internal Dimensions

External Dimensions

Threats

Opportunities

17.5 673

Fig. 17.10 Analysis of Google’s strengths, weaknesses, opportunities, and threats. Source: Wirtz (2019)

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Based on the results of the SWOT analysis, the following problem statement can be derived: despite Google’s market leadership in online business, the company has not yet managed to extend its revenue basis through multiple income streams. The unsystematic and unclear extension of Google’s range of services offered through trial and error has not yielded sustainable revenue options.

Solution to Question 2 Based on this analysis, derive strategic opportunities of action and critical success factors for the management of Google. Name present success factors of Google. As mentioned earlier, there are four basic strategic opportunities of action according to the SWOT analysis. To begin with, Google can follow SO (strengthopportunity) strategies, taking advantage of existing opportunities through own strengths. More specifically, it may use the existing service range for revenue differentiation or extend activities in growing markets in order to establish new forms of revenue and extend existing ones. These particularly include mobile business (e.g., Google Nexus, Google Pixel, Google Duo), social media (e.g., Google Currents), Internet of Things and automation (e.g., Google Home, acquisition of Nest Labs), augmented and virtual reality (e.g., Google Cardboard), artificial intelligence, machine learning, and big data. In addition, Google has also further opportunities through monetizing its broad range of services (especially its content offers). Google can also pursue ST (strength-threat) strategies, using its own strengths to avert existing threats. In this connection, it can encounter risks by enhancing and extending the current service spectrum. Moreover, Google can utilize its dominant position in the search engine market and its technological leadership to outperform competitors. It may also focus on core markets to safeguard sustainable market positions. Furthermore, Google can follow WO (weakness-opportunity) strategies, eliminating own weaknesses to take advantage of opportunities. In this context, Google can encounter its weaknesses by exploiting existing revenue potential by streamlining its range of services and monetizing services with no or low revenue. In addition, Google can extend its market leadership in online marketing through market expansion. Finally, Google can engage in WT (weakness-threat) strategies, eliminating own weaknesses to be able to face threats. For the purposes of eliminating own weaknesses, Google can abandon those services that generate no or low revenue and refocus its market offer model. In addition, Google should not only define the revenue purpose of all services to extend its revenue basis but also expand its online marketing activities even in weak markets in order to prevent being driven completely out of the market by competitors. Figure 17.11 summarizes the strategic options for Google based on a SWOT analysis.

Weaknesses

Strengths

Internal Dimensions

External Dimensions

• Monetization of services with no or low revenue

• Monetization of services with no or low revenue

• Extension of market leadership in online marketing through market expansion

• Exploitation of existing revenue potential through streamlining the range of services

• Extension of market leadership in online marketing through market expansion

Eliminating own weaknesses to take advantage of opportunities

Eliminating own weaknesses to take advantage of opportunities

• Exploitation of existing revenue potential through streamlining the range of services

• Monetization of broad range of services (especially of content services)

• Utilization of dominant position in the search engine market and of technological leadership to outperform competitors

• Extension of the mobile business (e.g. Google Nexus, Google Pixel, Google Duo), social media (e.g. Google Currents), Internet of things and automation business (e.g. Google Home, acquisition of Nest Labs), augmented reality and virtual reality business (e.g., Google Cardboard), artificial intelligence, machine learning and big data in order to establish new forms of revenue and to extend existing ones

• Focus on core markets to safeguard sustainable market positions

Using own strengths to avert existing threats • Enhancement and extension of the current service spectrum

• Use of existing service range for revenue differentiation

Threats

Taking advantage of existing opportunities through own strengths

Opportunities

17.5 Google Case: Questions and Solutions 675

Fig. 17.11 Strategic options for Google based on a SWOT analysis. Source: Wirtz (2019)

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Google/Alphabet Case Study

Beyond these strategic opportunities for action, Google has the following core competencies at its disposal, which at the same time are critical success factors of Google: • An essential success factor of Google is its technologically cutting-edge search algorithm that is continuously enhanced. Thus, Google’s technology competence represents one of its key strengths. • For a long time and in contrast to other competitors (e.g., Yahoo), Google’s business model management has focused its core business on its search engine and search engine marketing. Google’s focus competence and business model management competence is another core asset. • Google created a huge network that generates a major amount of revenue today. Google’s ability to manage this diverse portfolio is its networking competence. • The high diffusion and acceptance of Google’s search engine leads to Google’s market leadership. With regard to its brand management, this market position allows Google to maintain a unique and differentiated corporate profile. Google has demonstrated its very strong brand management competence.

Solution to Question 3 Reflect upon these potential strategic alternatives and choose the dominant one. Given Google’s dominant position in the online business sector (especially in the advertising market) and its strong position in other markets, the SO strategy seems suitable, as opportunities can be exploited with own strengths. A crucial element of this strategy is revenue differentiation: • Utilization of the existing service spectrum for revenue differentiation • Extension of the mobile, social media, Internet of Things, and big data segments to establish new revenue flows and extend existing ones • Monetization of the broad range of service offers

Solution to Question 4 Discuss various opportunities for Google to differentiate itself in the context of revenue optimization. Which recommendation for action would you give Google? Google has a lot of potential for revenue differentiation resulting from various measures that generate revenue. These can be classified according to different revenue categories, comprising direct transaction-dependent, indirect transactiondependent, direct transaction-independent, and indirect transaction-independent revenues. Measures for generating direct transaction-dependent revenue include

17.5

Google Case: Questions and Solutions

677

software sales, hardware offers for the mobile sector (e.g., smartphones or tablets), as well as further extending the hardware offers in the server segment and range of payment service offers. Software sales have a low revenue potential because many products are based on open source and are therefore difficult to realize with the current structure of service offers. In addition, this carries a high risk due to the reduced coverage and negative impact on the core business (advertising). Consequently, software sales are not suitable for revenue differentiation. Hardware offers for the mobile sector show a very high revenue potential but also a high risk of losing important network partners and risks with regard to competition law. Overall, this measure for revenue generation appears as highly suitable for revenue generation and differentiation. Extending hardware offers in the server segment has a low to medium revenue potential due to the highly competitive market and its special distribution structures. This measure only carries a medium risk due to Google’s high technological competence. Therefore, this measure of revenue generation appears to be moderately suitable for revenue generation and differentiation. Extending the range of payment service offers has a high revenue potential particularly in the mobile area. Although there is strong competition with providers like PayPal, this measure bears a low risk because Google already has an appropriate infrastructure, making it very highly suitable for revenue generation and differentiation. Extending the hardware and software offers in the field of Internet of Things, automation, artificial intelligence, and machine learning has a high revenue potential especially with regard to smart home appliances. There is a low risk due to Google’s technological leadership and moderate competition in the market. As a result, this measure is very highly suitable for revenue generation and differentiation. In addition, extending hardware offers in the field of augmented or virtual reality is characterized by a low to medium revenue potential and a medium risk due to the moderately to highly competitive market environment. Therefore, this measure is only moderately suitable for revenue differentiation. Moreover, measures for generating indirect transaction-independent revenues include commission fees that Google receives in its role as digital commerce intermediary (e.g., Google Product Search, Google Merchant Center, and Google Shopping). Here, Google has a high revenue potential due to its role as a gatekeeper in online shopping but at the same time a medium to high risk of engaging in competition with current customers. Overall, this measure appears as highly suitable for revenue differentiation. Furthermore, measures for generating direct transaction-independent revenues comprise price differentiation for licenses of premium products or for business customers, as well as fee-based licenses and letting of server capacities (cloud computing). Price differentiation for licenses of premium products has a low to medium revenue potential, as only few services are suitable for this model. Given

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17

Google/Alphabet Case Study

that it provides an added benefit, there is a relatively low risk, not least because it is an approved instrument (see Google Earth Plus). However, in view of the formerly free functions, such price differentiations also carry a high risk of user churn. Altogether, this measure is moderately suitable for revenue differentiation. Price differentiation for licenses for business customers has a medium revenue potential because the model is quite established but not suitable for all services. Similarly, there is a medium risk as it is an established model in online business, making it overall a moderately suitable measure for revenue differentiation. Fee-based licenses have a high revenue potential due to the high number of users. Yet, there is not only a very high risk of end user churn and a certain risk of brand erosion but also a medium risk in the business sector because here it is already partially established (Google Maps API). Accordingly, this measure is less suitable for revenue differentiation. The letting of server capacities (cloud computing) has a very high revenue potential for Google, as necessary structures are already established in the emerging market. While this measure is characterized by a medium to high risk in the private customer segment due to competing offers that are free of charge, it only carries a low risk in the business customer segment and thus is very highly suitable for revenue generation and differentiation. Finally, measures for generating indirect transaction-independent revenues particularly refer to the extension of revenues from data mining and big data analysis (selling user data). Here, Google has a high revenue potential due to its broad portfolio of diverse user data. However, this is also associated with a high risk due to problems of acceptance among users and potential user churn, thus negatively influencing Google’s core business. In addition, this also carries legal risks and therefore appears to be only moderately suitable for revenue differentiation. Figure 17.12 summarizes various measures of revenue generation and evaluates them in terms of their revenue potential and risk. Due to the great differentiation, not all kinds of advertising revenues are considered.

17.5

Google Case: Questions and Solutions

Measures for Revenue Generation

Direct Transaction-Dependent Indirect TransactionDependent Direct Transaction-Independent

Revenue Potential

Risk

Low potential because a lot of products are based on open source and therefore difficult to realize with the current structure of service offers

High risk due to reduced coverage and negative impact on core business (advertising market)

Hardware offers for the mobile sector (smartphones, tablets, etc.)

Very high potential (see Apple)

High risk of losing important network partners, risks with regard to competition law

Extension of the hardware offers in the server segment

Low to medium potential due to highly competitive market and its special distribution structures

Medium risk due to high technology competence

Extension of the payment service range

High potential, especially in the mobile sector

Low due to existing infrastructure, but strong competition with other providers (e.g. PayPal)

Extension of hardware and software offers in the field of Internet of things, automation, artificial intelligence and machine learning

High potential, especially with regard to smart home appliances

Low due to technological leadership and moderate competition

Extension of hardware offers in the field of augmented or virtual reality (e.g. wearables)

Low to medium potential

Medium risk due to moderate to high competition

Commission fees as ecommerce intermediary (e.g. through Google Product Search, Google Merchant Center, and Google Shopping)

High potential due to Google’s role as gatekeeper in online shopping

Medium to high risk due to competition with current customers

Price differentiation for licenses (premium products)

Low to medium potential because only few services are suitable for this model

Relatively low risk as long as there is a recognizable added benefit, approved instrument (see Google Earth Plus), high risk of user churn in view of formerly free functions

Price differentiation for licenses (charged for business customers)

Medium potential because the model is quite established, but not suitable for all services

Medium risk because it is an established model in online business

License fees

High potential due to high number of users

Very high risk of end user churn, risk of brand erosion, medium risk in the business sector because here it is already partially established (Google Maps API)

Letting of server capacities (cloud computing)

Very high potential because necessary structures are already established in the emerging market

Medium to high risk in the private customer segment, low risk in the business customer segment

Extension of revenues from data mining and big data (sale of user data)

High potential due to Google’s broad portfolio of diverse user data

High risk due to problems of acceptance among users, resulting in user churn (impact on core business) and legal risks

Software sales

Indirect TransactionIndependent

679

Not suitable

Less suitable

Moderately suitable

Highly suitable

Rating

Very highly suitable

Fig. 17.12 Opportunities for differentiation with regard to revenue generation. Source: Wirtz (2019)

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Google/Alphabet Case Study

Chapter 17 Topics for discussion Topics for classroom discussion and team debates 1. Google's goal is to make all information available worldwide, while generating revenue from personalized targeted advertising. Discuss this tension between Google's vision and Google's revenue model. 2. Google is the central gatekeeper in the Internet and has billions of personalized and non-personalized data of people worldwide. Discuss to what extent this central gatekeeper function of Google is desirable against the background of future social and democratic developments. 3. Google has a monopoly-like market position worldwide. Against this background, a break-up of Google is under discussion. Discuss the advantages and disadvantages of breaking up Google from a social and economic point of view, in particular against the background of Google's considerable profit position.

Selected Digital Case Studies

18

Contents 18.1

18.2

Digital Business Model Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wikipedia Case Study: Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . eBay Case Study: Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bing Case Study: Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LinkedIn Case Study: Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-Commerce Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . eBay Case Study: Digital Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spreadshirt Case Study: Digital Products and Digital Services . . . . . . . . . . . . . . . . Yahoo Case Study: Digital Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amazon Case Study: Digital Customer Relationship Management . . . . . . . . . . . . UBS Case Study: Digital Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_18

682 682 687 691 696 700 701 702 704 709 711

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Against the background of the conceptual and theoretical content presented in the previous chapters, the following chapter deals with practical examples of companies in the field of digital business. The content of the previous chapters is transferred to real-world context, and the development and actions of the companies are respectively explained. This also enables to draw conclusions for other companies and derive explanatory approaches. The chapter is divided into two sections. Section 18.1 provides examples of companies that have emerged in the digital context and shall serve as cases of the four different C-models described in Chapter 10. Section 18.2 provides examples of companies that follow a tradebased commercial business model that is based on digital channels. Such companies can be assigned to the field of e-commerce and can serve as a kind of digital archetype examples for the content presented in the previous chapters.1

18.1

Digital Business Model Cases

The 4C-net model offers a conceptual framework to understand the basic value creation of digital business focused on private customers. Such abstract underpinning of commercial ventures and companies helps practitioners and scholars to comprehend the value addition, proposition, constellation, and capture of respective B2C firms. The following section therefore presents company cases that can be attributed to one of the four Cs and thus offer a blueprint for the functioning in the respective sector. It is worth mentioning that the different Cs only describe a specific aspect of a company’s activities, which is why even companies that can be strongly attributed to a specific C often also incorporate other Cs in their business activities.

Wikipedia Case Study: Content The following section describes the business model of Wikipedia as an example of the content model. Wikipedia is a non-commercial Internet-based online encyclopedia that provides free and freely accessible information. As a knowledge platform focusing on collaborative information exchange, Wikipedia belongs to the content business model and the business model type of e-information. It is based on the Internet encyclopedia project “Nupedia” by Jimmy Wales and Larry Sanger, which was realized by the company Bomis. While originally only available in English, versions in other languages were already offered in March 2001. It is now one of the world’s 50 most frequently accessed websites and by June 2019 already contains over 50 million articles in around 300 languages (Wikipedia 2020b). Among the first offshoots was the German version of the online encyclopedia. With approximately 2.4 million articles, it is the fourth largest version after the

1

See for the following chapter also Wirtz (2020b).

18.1

Digital Business Model Cases

683

English-, Swedish-, and Cebuano-language Wikipedia editions, which are mostly computer-generated articles containing between 3.7 and 5.3 million articles (Wikipedia 2020a). Formally, Wikipedia is operated by the non-commercial Wikimedia Foundation Inc. founded by Jimmy Wales in June 2003. The Wikimedia Foundation is headquartered in San Francisco, USA, and is dedicated to the promotion of free knowledge. In addition to the foundation, there are also independent Wikimedia associations in many countries, which are closely connected with the Wikimedia Foundation. Wikimedia Foundation employs more than 350 people, as well as additional personnel independent of the Foundation in the individual Wikimedia associations across the world. According to its own statements, the free and collaborative encyclopedia is financed almost exclusively by donations. These are mainly individual donations from private individuals and companies. In addition, further support, in the form of money and material contributions, is provided to the Wikimedia Foundation by other foundations. In addition to the free encyclopedia Wikipedia, the Wikimedia Foundation runs several other projects: Wiktionary (online dictionary), Wikibooks (online library with textbooks, non-fiction, and specialist books), Wikiquote (online collection of quotations), Wikisource (online collection of source texts), Wikispecies (directory of biological species), Wikimedia Commons (online database of images, videos, music, and spoken texts), Wikinews (online news source), Wikivoyage (a travel guide), Wikidata (a data collection), and Wikiversity (online learning, teaching, and research platform). The Wikipedia homepage has a simply designed and clearly arranged user interface with various functions. These are shown in Fig. 18.1 as an example. There is a simple search function to generate the desired information quickly and conveniently, a login area that offers personalized applications, a discussion forum, and the possibility of editing articles anonymously or via the login area. In addition, it is possible to retrace via an author/version mode who created the article or when certain parts of the article were edited or submitted for discussion. Moreover, users can easily access the desired article in other languages and benefit from various tools, such as a feature for creating PDFs. The content of Wikipedia currently consists mainly of text content, photos, tables, and drawings that will be supplemented by animations and videos in the future.

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18 Selected Digital Case Studies Login area and search tool Article

Discussion platform Possibility to track article history

Further options

Table of contents

Fig. 18.1 Homepage Wikipedia. Source: Wikipedia (2020b)

Wikipedia is technologically based on the functioning of a wiki system. This is a hypertext-based content management system for websites that allows individuals to easily receive and actively participate in the text design through its high user friendliness. In addition, a version control enables to keep changes transparent and thus reversible (Wikipedia 2020b). Unlike the Google offer that is also free, Wikipedia does not have a commercial, revenue-based business model. In contrast to the concept of Wikipedia, Google (Alphabet) generates billions of dollars in revenue and profits from the sale of search results that are needed for context-intensive online advertising. Wikipedia can be understood as a counter model to the commercial primacy of the disposition of knowledge and information that is particularly illustrated by its political and social significance. The business model of Wikipedia is based on the idea of cooperative information generation by the user and is primarily attributed to the pure content area, although one can discern certain intra-connection characteristics in the integrated community tools and discussion pages. Wikipedia mainly focuses on the informational and educational aspects of its provided content. Accordingly, the business model type of Wikipedia belongs to the business model type of digital information. Digital information places special emphasis on the informational, problem-solving-oriented content. As an information provider, Wikipedia does not focus on a specific subject area but primarily acts as a free knowledge-based navigator across a wide range of areas. As shown in the simplified business model of Wikipedia in Fig. 18.2, the fundamental objective of the company is to offer users information easily and conveniently in an encyclopedic form and free of charge. In addition, users not only have the opportunity to receive but also to edit this information. The content of the online encyclopedia is collectively created by a voluntary and honorary author community and made available on the website of Wikipedia.

Strategy Model

Contribution of Hard and Software

Coordination and Communication

Accepting Content

Content Creation

Finance Model

• • • • • • • •

Content sourcing competence Quality management competence Content development competence Distribution competence Brand Employees Networks IT infrastructure

…

Community Aspects

Expert Forums

Connection

…

Topic Portals

Search Functionalities

Content Linking

Knowledge Content

Content

Market Offer Model

Competencies/Resources Model

User/Expert Interaction

Acceptance or Rejection by Wikipedia

Quality Assurance by Wikipedia

Publishing of Content by Wikipedia

Management of Communication Services

New UserGenerated Content

Contributions to UserGenerated Content

Value Creation Model

• • • •

Network Model

Donations

Interaction

Distribution

Presentation

Revenue Model

User Channels

Users such as Foundations, Institutions, etc.

Recipients

Customer Model

ILLUSTRATIVE EXAMPLE

Network of anonymous volunteers Donation community Information linkage Access to rights and databases

Information Service

Wikipedia’s five pillars strategy: • Wikipedia is an encyclopedia • Wikipedia is written from a neutral point of view • Wikipedia is free content that anyone can use, edit and distribute • Editors should treat each other with respect and civility • Wikipedia has no firm rules

Internet Community

User and Contributors

Procurement Model

Wikipedia

18.1 Digital Business Model Cases 685

Fig. 18.2 Business model of Wikipedia. Source: Based on Wirtz (2010b, 2020b) and own analysis and estimations

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This added value can serve as an example of user-generated content in the context of Web 2.0 or social media. In this case, Wikipedia is solely responsible for recording the contributions as well as providing the hardware and software. The coordination of communication within the community or the discussion forums is mutually realized and primarily shaped by user interaction. Within the revenue and distribution models, the financing is primarily based on donations from private and institutional sources. The core assets of Wikipedia include the easy accessibility of information and the technological infrastructure of the project. The website of Wikipedia is particularly characterized by ease of use and a user-friendly user interface. This allows to change the text directly in the web browser without prior technical knowledge. In addition, one of the core assets of Wikipedia is the high level of awareness and information leadership in the field of knowledge. This is associated with an extensive collective accumulation of knowledge and requires a high level of activity of the intrinsically motivated authorship. Another core asset is the clear scalability of the work processes outside the community and the associated low personnel costs within the foundation. The core competence of Wikipedia especially refers to its content sourcing competence. This includes the ability to gain high-quality information and entertainment content, as well as authors or producers as input for content production. Figure 18.3 summarizes

Aspects

Strategy

• Provision of free online content in the area of online encyclopedias • Information leadership in the knowledge sector

Business Model

• Content aspect: collection, selection, systematization, compilation and provision of knowledge in form of a freely accessible and advertisement-free information portal • Business model type: digital information without focus on one specific area of information

• Extensive pool of knowledge

Service Offer

• Extended content through other Wiki-tools • Integration with other Wiki-tools • Community Features • Non-profit, free-of-ads and free-of-charge encyclopedia • Activity of intrinsically motivated authors

Success Factors

• Well-known brand • Large customer base, high number of users • Community aspect • Collected knowledge of a worldwide collective authorship

Fig. 18.3 Strategic orientation of Wikipedia. Source: Wirtz (2010b, 2020b)

18.1

Digital Business Model Cases

687

the strategic orientation of the company, as well as its business model, service offer, and success factors. Competitors seek to challenge the strong information leadership in online encyclopedias. For example, the provider of the Brockhaus Encyclopedia advertises its online encyclopedia project, which is intended to provide convincing information primarily through the principle of non-manipulable knowledge information. In general, publishers interested in commercial exploitation must continue to push innovative projects so that their paid products, such as Encarta, Encyclopedia Britannica, or the many subject encyclopedias, such as those of Elsevier Publishers, are used or so that users will be prepared to use them for a fee if there is a possibility of obtaining knowledge free of charge.

eBay Case Study: Commerce eBay is currently the most successful online platform for online auctions and is also one of the first Web 2.0 applications ever. The auction house is primarily the product of the joint activities of its users who can purchase and sell items on the digital marketplace. The US company eBay Inc. was founded by Pierre Omidyar in San José, California, in September 1995. Originally known as AuctionWeb, the American eBay Inc. bought the German Internet auction platform Alando for 43 million USD in the summer of 1999. Since then, eBay’s expansion course has continued unabated. For example, in 2002 eBay acquired the Internet payment service provider PayPal that was spun off from eBay in 2015 as an independent and listed company. In 2004, eBay acquired the business portal Rent.com, and one year later the purchase of Shopping.com and Skype as well as a continuous purchase of foreign auction sites followed. Besides the acquisition of various companies, eBay also focused on takeovers that the global company successfully integrated into its own business model. In 2004, eBay acquired the German online advertising market for vehicles, mobile.de, the Swedish Internet-advertising portal Tradera.com, and the auction-processing tool Afterbuy in 2007. Further acquisitions by eBay include the local shopping search engine Milo in 2009, the shopping portal brands4friends in 2010, as well as the e-commerce company GSI Commerce in 2011 (eBay 2018; Wikipedia 2020a). Since its foundation, eBay has become one of the largest marketplaces in the Internet and a profitable company. According to its own figures, it is the most highselling online auction provider in the world with more than 174 million buyers worldwide (eBay 2020b). In fiscal year 2019, services and goods worth around 10.8 billion USD were sold on the platform, and eBay generated a profit of around 1.78 billion USD. eBay is a listed company whose shares are listed on the New York Nasdaq technology exchange. In the first quarter of 2020, the revenue reached 2.4 billion USD (eBay 2020e).

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The user interface of eBay is continuously changing in accordance with long-term design trends, product trends, the country it is used from, or the respective season of the year. The wide variety of products makes it necessary to structure the website in a way that users can intuitively find the products demanded. There are two ways of identifying the respective product: the search function and the category search. After entering a specific search term, a list of offers appears. While some offers can be purchased immediately (fixed price offers), others can be acquired by means of an auction. All offers are usually provided with a product picture and a short description. However, selling or buying goods on eBay is only possible through a formal, free-of-charge membership. In addition, the user is offered a variety of other functions. For example, besides the login area and a buy/sell mode, there is a special community page with further options such as eBay blogs, eBay news, theme worlds, as well as discussion and help forums. eBay’s business model is based on providing an online platform for the purchase and sale of any commodity. In doing so, the company itself does not act as a seller but only provides the infrastructure that sellers and buyer can use. Since the platform acts as an intermediary for sales, it can be regarded as a service. The digital good that eBay provides is therefore the use of the auction and sales platform, which together with the brand name of the digital marketplace generates a high number of potential customers. The business model of eBay is clearly assigned to the commerce business model. This approach can be divided in the processes initiation, negotiation, and processing of business transactions. The services within the framework of the commerce business model can be subdivided into three further business model types, whereby eBay as an auction platform mainly belongs to the type of the digital bargaining/ digital negotiation. The business model type of digital transaction is also applied through the purchase of the Internet payment service provider PayPal, which has been integrated into the eBay business model. The focus of the eBay business model is, however, on the digital bargaining/digital negotiation. Starting out as a pure C2C platform, eBay has later also become a platform for professional sellers and thus expanded to a B2C platform. There are three possible sales variants: selling to the highest bid (auction), selling at a fixed price (immediate purchase), and a permanent offer. The traditional and most frequently used variant of selling on eBay is the auction. Here the offerer gives a starting price and a time span until when the respective commodity is offered. In addition to the auction, other types of offers have also established themselves on eBay. For example, the classic auction can be supplemented by the paid buy-it-now function that enables the buyer to purchase the product at a fixed price without waiting for the end of the bidding period. Commercial suppliers usually do not use the auction type but rather the immediate purchase. This type of offer largely corresponds to the classic web shop. In the case of a permanent offer, the so-called eBay shop presents the offers that are for sale

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Digital Business Model Cases

689

without a specific end date. In some cases, sales are also offered on a negotiated basis. eBay’s revenue rests mainly on fees. In addition, eBay generates revenue through advertising placed on its websites. The seller fees consist of a so-called setup fee and a commission. Thus, the supplier has to pay a non-refundable charge and a charge depending on the starting price. For this entry fee, the seller receives the listing on the eBay server. Additional setting options, such as highlighting the auction offer in the search results, an exposed placement of the auction, or a higher number of several images, are subject to additional costs, but can, in turn, generate higher auction prices. Apart from the setup fee, eBay charges a commission between 2% and 12% depending on the final price (eBay 2020c). In addition to offering the use of the auction platform, eBay offers supplementary services. These primarily relate to online payment. For example, the buyer can use the online payment system PayPal. The functionality of the system is based on the principle of a trust account. The seller receives an immediate notification as soon as the purchase amount has been received by PayPal. The goods can then be dispatched promptly. This ensures a quick receipt of payment on the part of the seller and in return provides the buyer with additional security during the processing, as PayPal is liable for a possible delivery failure. The costs for the use of the payment system are borne exclusively by the seller. Figure 18.4 illustrates the eBay business model in a simplified form. An integral part of eBay’s business model and a major core asset of the company is the online community or the wide customer network and the large customer base connected by various additional services. This also relates to the company vision that seeks to create and promote a web community. Therefore, the forerunner of eBay, AuctionWeb, already had forums and message boards. The customer base of eBay results from the large number of users that have sold or purchased on eBay over the last 20 years. Additional confidence-building measures between buyers and sellers, such as the internal rating system, have further reinforced the standing of eBay. Those aspects are the basis of the success of this digital marketplace. The large number of users is the central argument for using eBay as a sales platform. Sellers accept the relative high transaction costs due to the large group of potential buyers, which would be difficult to reach with a classic web shop. The successful use, combination, and development of core assets requires core competencies. These lie mainly in the provision and operation of the technical infrastructure, in particular, the smooth use of the Internet platform as well as the broad assortment design, which attract a large number of users. Another core

Strategy Model

Payment

Provision of Content

Payment

Services

Payment

Accepting an Offer

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Commerce

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eBay Blogs

eBay News

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• Presentation • Distribution

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ILLUSTRATIVE EXAMPLE

Customer Relationship Management

• Integration of PayPal and other payment gateways • Retailer network • Network of private trade- and craftsmen • Network effects • Digital word of mouth • Cooperation and partner programs

Initiation, Negotiation, Fulfillment and Implementation of Transactions

Competencies/Resources Model

Placing / Inclusion

User Interaction

Offering the Web Platform/ Market Place

Market Offer Model

• First-mover advantage • Large customer base • Community character • Technological infrastructure • Strong brand, deonymization • Competence of promoting advertising efforts

Management of Web-Based Cooperation

Administration of Communication

Creation of an Product Offer, User-Generated Content

Value Creation Model

Integrated Product/Service Offer

• eBay enables sellers worldwide to organize and offer their inventory for sale and buyers to find and buy it digitally anytime and anywhere

Advertising Clients

Internet Community

Seller

Procurement Model

eBay

690 18 Selected Digital Case Studies

Fig. 18.4 Business model of eBay. Source: Based on Wirtz (2010b, 2020b) and own analysis and estimations

18.1

Digital Business Model Cases

691

competence of eBay refers to its successfully implemented and efficient customer management. Figure 18.5 shows eBay’s strategic orientation, its business model, as well as its service spectrum and the success factors.

Aspects • Provision of online auction plattform and market place

Strategy

• Further services related to the negotiation/ bargaining as well as the processing of transactions through the Internet • Market leader of online auctioning

Business Model

• Commerce aspect: initiation, negotiation and processing of business transactions • Business model types: digital bargaining/digital negotiation • Provision of a simple online plattform to present and offer products, as well as an optional auction-based pricing tool

Service Offer

• Extended services to increase visibility, market products, as well as the integration of different payment options • Community features • First-mover advantage, well-known brand

Success Factors

• Large customer base, high number of users • Community aspect • Worldwide market leader in online auctions

Fig. 18.5 Strategic orientation of eBay. Source: Wirtz (2010b, 2020b)

Bing Case Study: Context Bing is an Internet search engine by Microsoft that replaces the company’s previous search function Live Search and seeks to challenge the market leadership of the Internet search engine Google by major improvements. Microsoft understands its search engine Bing as a “decision-maker,” which is intended to make it easier for the user to quickly and clearly handle the information explosion of the Internet, as well as to help the user with daily decisions, such as travel planning and shopping (Microsoft Press 2009). Bing was introduced in June 2009 and is based on Microsoft’s search engine Live Search that is also the successor of Microsoft’s earlier Internet search service MSN. Due to the limited market reach of Microsoft’s search engine Live Search that was available until mid-2009, Microsoft created the new search service Bing that can thus be seen as a response to the weak market shares of its predecessor. At the end of

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18 Selected Digital Case Studies

2019, Bing had a share of the global search engine market of around 2.4%. The market leader is Google with a market share of 92.6% and Yahoo! reaches a market share of 1.8% (StatCounter 2020d). The functions of Bing are strongly based on those of its main competitor Google. Bing also offers the possibility to categorize the search query. Here, the user can choose between the categories: web, images, videos, maps, news, and explore. Other functions similar to Google include a login area; the possibility to change preferences, such as language; and the access to other in-house products (MSN, Outlook.com). When entering the search terms, Bing provides—just like Google— an autocomplete and suggest function for entered search terms. In contrast to Google that usually offers the user ten suggestions, Bing gives the user eight suggestions (Bing 2020). The most obvious difference to the market leader Google is the daily-changing background image on the Bing homepage, which addresses spectacles of nature or current events in the world, such as the Olympic winter games. In this connection, Bing also sets itself apart from Google by providing entertaining features on the homepage with regard to this background image in order to induce the users to search and lead them into their search engine results page (SERP). In doing so, Bing has integrated two mouseover effects that display different teasers. While one teaser contains the Bing homepage quiz, the other teaser provides a link for further information on the background theme and gives the user the opportunity to share this information on social networks such as Facebook and Twitter or via its own communication tool Skype. In addition, further teasers with information on current events or relevant topics are displayed in the bottom bar of the user interface (Bing 2020). According to Microsoft, another difference to the market leader Google is the decision function. In this context especially the travel planning is to be mentioned. For example, when entering a certain destination, the user is forwarded directly to a service area that provides extensive service functions, such as reservations and online bookings as well as information on the weather and special travel maps for the user. Compared to Google, Bing also focuses more strongly on personalization and customization options for the user. In doing so, it offers the user, for instance, to save image results and add interests, like top news, stocks, weather, and so on, which the user can then directly access via Bing’s homepage. Bing also allows the user to customize its homepage by showing or hiding news and interests as well as the menu bar. Another unique feature of Bing is its rewards program Microsoft Rewards through which users are extrinsically incentivized to use the search engine. According to this, users can earn points for searching with Bing and eventually redeem these points in exchange for electronic devices, movies, music, games, etc.

18.1

Digital Business Model Cases

693

In sum, Bing’s strong emphasis on a visually appealing homepage with entertaining elements aims to attract users to the search engine. In addition, Bing’s various suggestive entry points and rewards program are designed to induce users to search. Besides the rewards program, particularly, Bing’s personalization and customization features aim to bind users to the search engine in the long run. Since Bing’s core business is concerned with the classification and systematization of information available on the Internet, the business model primarily belongs to the context area. The strategic goal of Bing’s business model is to organize and systematize the information available on the Internet and make it accessible to all Internet users in a user-friendly form. Particularly important is that the service is free of charge for the user and monetized almost exclusively via advertising on the site similar to Google. By offering personalized and self-written content, such as the teasers on the homepage, Bing’s business model also contains content elements. Moreover, the integration of Microsoft’s chat and communication services MSN as well as the webmail provider Outlook.com partially extends the business model by connection elements. Context business models can also be categorized according to their functions. Bing, for instance, belongs to the areas of digital search and general search. The basic function of general search services is based on the information retrieval system. Search requests go to the search provider and deliver the indexed and collected information to the user, arranged according to the usage frequency of search results. Bing mainly obtains its input from communities, content providers, and news agencies. The information transfer or interaction follows a simple structure. The pages or content are reported and upon inspection by Bing either rejected or included in the company’s index. Bing generates additional input from media companies that are responsible for coordinating external communication in a kind of interaction. The service provision of Bing is designed directly and linearly. In the area of context offers, information is first collected, systematized, and classified, in order to store it and provide it to the users as a result of on-demand requests. The area of content offers is particularly characterized by the collection and systematization of third-party content that is adequately processed and made available to the user. With a few exceptions, the service provision of context and content offers is coordinated linearly and without interdependency between the user interaction and the communication service management. Connection offers, by contrast, are characterized by a strong interdependency between the user interaction and the communication service management. The company is particularly financed by advertisements of business customers on the Bing website. These advertisements are displayed according to the principle of a free newspaper and corresponding to the search query, but with the difference that the search engine follows a personalized approach and estimates the interests of the user based on the data input (keyword advertising).

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18 Selected Digital Case Studies

With its search engine Bing, Microsoft intends to become a major player in the Google-dominated search market. Although Bing’s market share is currently still small, Microsoft expects to be able to expand its position in this market through the direct integration of the search in a variety of Internet-capable devices and the further development of the search from a reactive, portal-oriented to a proactive, forwardlooking service. A key aspect of this strategy is the creation of a cross-device user experience where the user receives relevant results without having to search for them themselves. Figure 18.6 shows a simplified form of the Bing business model based on the nine partial models. Bing has extensive competencies and resources. Its core assets are diverse and are further strengthened by the strong company Microsoft behind it. In this connection, particularly the hardware and software stands out, which is supported by the extensive experience of the parent company Microsoft. Since Bing aims to develop today’s Internet search even more toward maximizing efficiency for the user and relevance of the search results, various Microsoft search technology centers are constantly working on new developments. Bing particularly distinguishes itself by its specialized technological infrastructure, which is especially reflected in a superior software system as well as a high redundancy and good load balancing. Another core asset of context providers is the brand. Bing as a brand is currently not nearly as strong and popular as Google. However, since the powerful company Microsoft is behind Bing, it is expected that over time the brand awareness of Microsoft will spill over to its search service Bing. In order to successfully use and further develop the core assets presented, Bing relies on various core competencies. In this connection, particularly the listing and structuring competence stands out, which primarily involves the identification and representation of the relevant search results for a search query. A core competence of Bing is its service and CRM competence. The user interface of Bing is characterized by a particularly good handling and intuitive usability. Moreover, it also provides a benefit in the form of the changing background image combined with current events and the corresponding display of teasers. The resulting added benefit and the simple and well-structured handling of the search interface represent important service features for the user. The opportunity

Strategy Model

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Payment

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…

Keyword Advertising

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Outlook.com

MSN

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Placement Integration

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• • • • • •

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• Advertisement • Usage of technologies

Revenue • Advertisement services • Lettings • …

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ILLUSTRATIVE EXAMPLE

• Customer Input

Interaction

• Presentation • Distribution

Performance

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Integration in platforms and applications Embedded in Microsoft Windows (Cortana) Network effects Digital word of mouth Cooperation Partner programs

Integrated Product/Service Offer

• Specialized technological infrastructure (redundancy ability, load balancing, superior software system) • Preparation, systematizing, collection and provision of data, • Strong brand, deonymization • Contextualizing competence • Technological competence • Competence of promoting advertising efforts

Management of Advertising Partnerships

Communication Service Management

Creation of Own Content

Collection and Selection of ThirdParty Content

On-Demand Provision of Search Results

Storage

Context Bing Search Engine (Full-Text Search on the Internet)

Classification

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Systematization of Information

Collection of Information

Value Creation Model

Bing

Digital Business Model Cases

• Search is transforming from a reactive service requiring precise data inputs to produce ranked outputs to a predictive service that thinks ahead the customers’ needs and delivers personal results on any device (3P strategy) The search engine is integrated into various applications and platforms

• Companies • Organizations • …

Advertising Customers

• News agencies • Content media companies • …

Business Content Provider

• Communities • Website operators • …

Private Content Provider

Procurement Model

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Fig. 18.6 Business model of Bing. Source: Based on Wirtz (2010b, 2020b) and own analyses and estimations

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18 Selected Digital Case Studies

to integrate the search engine via add-ons into various browser types also allows to bind users more closely to the service. Figure 18.7 summarizes Bing’s strategic orientation, business model, range of services, and success factors.

Aspects

Strategy

• Organize and systematize global presence of information on the Internet and provide it to users by means of an user-friendly interface

• Context aspect: classification und systematization of information available on the Internet • Business model type: digital search classified as general search

Business Model

• Partial content aspect: collection, selection, systematization, compilation (packaging) and provision of own content and thirdparty content

• Partial connection-aspect: opportunity to exchange information by means of social web applications, integration of Microsoft‘s services • Free search engine

Range of Services

• Integration of other Microsoft services such as MSN and Outlook.com • User-friendly interface • Brand awareness of Microsoft as parent company behind the search engine Bing

Success Factors

• Network effects/economies of scale • Cooperation and partner programs

Fig. 18.7 Strategic orientation of Bing. Source: Wirtz (2010b, 2020b)

LinkedIn Case Study: Connection LinkedIn is one of the pioneers in the field of professional networking of specialists and executives. It was founded on December 28, 2002, by Reid Hoffman, Allen Blue, Konstantin Guericke, Eric Ly and Jean-Luc Vaillant and went online on May 5, 2003. LinkedIn is primarily a professional networking site that presents CVs of professionals and executives, introduces employers, and advertises job vacancies. In addition, LinkedIn has also developed into a platform for the exchange of content. The LinkedIn website is the world’s largest professional network platform for professionals and executives. In its mission statement, LinkedIn says, “Our mission is to connect the world's professionals to make them more productive and successful” (Weiner and LinkedIn 2016).

18.1

Digital Business Model Cases

697

As a start-up, LinkedIn was financed especially by Sequoia Capital with venture capital. In January 2011, LinkedIn had its initial public offering (IPO) and by the end of 2016 Microsoft acquired LinkedIn for approximately 26 billion USD. The acquisition of LinkedIn by Microsoft shows the very successful development of LinkedIn. Already in 2008, LinkedIn had over 15 million users and opened the first office outside of the United States in London. In 2011, LinkedIn reached the mark of 100 million members and had over 1000 employees in 10 locations worldwide. With its 10th anniversary in 2013, LinkedIn had over 300 million users and rose to rank 24 of the world’s most popular websites. In 2020, LinkedIn counted more than 706 million members in over 200 countries worldwide (LinkedIn 2020). Against the background of substantial membership growth, LinkedIn was also able to significantly increase its sales and profits. LinkedIn achieved profits for the first time in 2006. In 2009, LinkedIn had only sales of 120 million USD. Four years later, it achieved sales of 1.53 billion USD. In 2015, sales rose to nearly 3 billion USD, with an EBITDA of 780 million or 26% of sales (LinkedIn 2016). In 2019, LinkedIn generated revenue worth 6.8 billion USD. In terms of costs, LinkedIn has reported an increase of 15% (equal to 2.2 billion USD) in R&D spending in 2019, as well as an increase of 4% in sales and marketing costs (equal to 744 million USD) (Iqbal 2020). LinkedIn has different revenue sources. Talent solutions, marketing solutions, and premium subscriptions generate the majority of LinkedIn revenues (Investopedia 2019). Due to the takeover in 2016, LinkedIn sales are consolidated with Microsoft’s total sales, whereby Microsoft no longer reports all previous detailed LinkedIn sales as usual. Nevertheless, the majority of revenue is still attributable to the talent solution tool that supports employers in the search for new talents (Iqbal 2020). Talent solution is the LinkedIn area that is dedicated to matching employees and employers. In addition to the ordinary placement of job advertisements, there are also opportunities for HR consultants to find potential specialists for their own customers in the database. The marketing solutions division focuses on the placement of personalized advertising. The third area, premium solutions, offers members a paid membership model that offers an extended range of services for private customers. Premium users, for example, are entitled to send invitations and messages to unknown members. As a market leader in professional social networking, LinkedIn is characterized by its comprehensive range of services. The homepage for non-premium users is very user-friendly and has an extensive range of functions. The homepage is built in a modular manner with many wellknown functions that are also available in other social networking sites, such as search functions, account functions, a newsfeed displaying personalized content, a messenger or chat field, a contribution field to which the user can post own content, and finally fields to add new contacts. In the stay connected and informed unit of LinkedIn, the company provides free services including editing and presenting the profile; receiving and creating postings; messaging; network and search features; contact suggestions and address book

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18 Selected Digital Case Studies

import; access to influencer content, to groups, and to the publishing platform; as well as to work in topic groups. In addition, there is also the advance my career section in the free customer account that not only allows to write job search notes or to look for company profiles and university pages but also includes the function to post references for others and to attribute skills to other persons. Furthermore, the ubiquitous access unit provides a free LinkedIn mobile app for all popular mobile systems, as well as multiple interfaces that allow LinkedIn to share data with other software. LinkedIn offers its business customers specific target group contacts and accurate targeting of specific target groups. In this way, they enable user-specific ad placement (micro-targeting) based on specific characteristics of the users obtained from their usage behavior (e.g., from reading specific content) or from concrete references in their profile. In addition, LinkedIn provides employers the opportunity to acquire data and to conduct big data analysis for their purpose. LinkedIn’s simplified business model is shown in Fig. 18.8. The strategic focus and value proposition of LinkedIn consist of the following three core components: stay connected and informed, advance my career, and work smarter. LinkedIn’s strategic goal is to be the most comprehensive, accurate, and accessible network for professionals around the world (LinkedIn 2014). The essence of its value creation is based on the provision of a platform that enables matchmaking and exchange among professionals and companies. A core asset of LinkedIn is the fact that its brand is established in the market and well-known market players or brands are using the platform. Generally, each LinkedIn user generates own content that can be retrieved by other users and recruiters. Distinctive technology and integration competence are also important core competencies of LinkedIn. In addition to ensuring smooth access to the platform (technology competence) and the associated access to the network infrastructure, the use of various access technologies is also particularly important in this context (integration competence). As a social networking platform, LinkedIn generally belongs to the connection business model. As described above (see Section 10.5), the connection business model can be divided into the two ideal business model variants: intra- and interconnection. LinkedIn and its offer belong to the variant of the intra-connection, which refers to the offer of communicative services within the Internet. In particular, LinkedIn belongs to the community area and the category of social networks, like Facebook. Since the LinkedIn platform provides user-generated content as well as its own content, the business model can also be partially assigned to the content business model, as LinkedIn deals with the collection and selection of content. The search function and the complex linking of content from the LinkedIn database can be assigned to the context business model. When it comes to advertising opportunities on LinkedIn, it is also possible to identify aspects of the commerce business model,

Agencies Companies Institutions …

Strategy Model

Placement of Ads

Placement Offer

Provision of Content

Large and global customer base Strong brand Community character IT infrastructure Technological competence

…

Advertising Space Keyword Advertising

Competencies/Resources Model

Placing/ Inclusion

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Content Search in LinkedIn

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Content User-Generated Content Micro-Targeting

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Posting of Content

Tagging Competencies

Messenger / Chat

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• • • •

Connection (Community Profile Presentation

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Customer Relationship Management Recruiter network Company network Cooperation Partner programs

Network Model

• Subscription Payment Premium Accounts • AdvertisingRevenue

Revenue

Interaction

• • • •

Agencies Companies Institutions …

Advertising Clients

• HR Units • HR Consultants •…

Recruiters

Companies (Company Profiles)

Private Users

Customer Model

ILLUSTRATIVE EXAMPLE

• Contacts • Content • User Behavior

Performance

Revenue Model

Digital Business Model Cases

Fig. 18.8 Business model of LinkedIn. Source: Based on Wirtz (2010b, 2020b) and own analyses and estimations

• • • • •

Management of Web-Based Cooperation

On-Demand Provision

Selection

Collection

Creation of Own Content

Profile Creation

Accepting Content

Collection and Selection of Content

User Interaction

On-Demand Provision of requested Data

Updating Database

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Accepting Content

Profile Creation

Accepting Content

Profile Creation

Value Creation Model

LinkedIn

Integrated Product/Service Offer

• Our mission is to connect the world’s professionals to make them more productive and successful • Value proposition: (1) stay connected & informed, (2) advance my career and (3) ubiquitous access

• • • •

Advertising Clients

• HR Units • HR Consultants •…

Recruiters

Companies (Company Profiles)

Private Users

Procurement Model

Finance Model

18.1 699

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18 Selected Digital Case Studies

such as the provision of initiation and negotiation functions. Figure 18.9 summarizes LinkedIn’s strategic focus, business model, service offer, and success factors.

Aspects

Strategy

• LinkedIn’s mission is to connect the world’s professionals to make them more productive and successful • Focus on intra-connection, offering online commercial and communicative services. LinkedIn is a community-platform and can be assigned to social networks within this context

Business Model

• Partly a content-approach by providing user-generated content in customer and company profiles. Here, the collection and selection of content is particularly relevant

• Partly a commerce approach through the sale of services to business customers and the provision of initiation/negotiation functions

Service Offer

• Provision of professional and company profiles and placement of contacts • Provision of personalized advertising • Provision of analysis services

Success Factors

• Brand awareness of the company and high number of users • Global presence and pronounced scale and network effects

• Comprehensive and differentiated recruiting services

Fig. 18.9 Strategic focus of LinkedIn. Source: Wirtz (2010b, 2020b)

18.2

E-Commerce Cases

Against the background of the conceptual and theoretical content presented in Part III focusing mostly on digital strategy, digital organization, and e-commerce, concrete company examples help to comprehend this content in the real-world context. The following section therefore provides insights into selected companies and their e-commerce activities. eBay serves as an example of a company that incorporates flexible digital pricing approaches, the Spreadshirt company serves as an example of successful digital products and digital services, Yahoo provides insights into digital communication, Amazon masters digital customer relationship management, and UBS serves as a company that uses modern digital procurement approaches.

18.2

E-Commerce Cases

701

eBay Case Study: Digital Pricing eBay is the most successful online platform for auctions on the Internet. The company has been profitable since its foundation in 1995. In 2019, eBay generated a net revenue of 10.8 billion USD with 174 million active buyers worldwide (eBay 2020a, b). Initially launched as a pure C2C platform, eBay was later opened up for professional sellers. However, eBay does not act as a seller itself but makes its digital marketplace available for a fee and thus acts as an intermediary for “sales.” The digital good provided by eBay is therefore the use of the auction and sales tools, which in combination with the brand awareness of the digital marketplace generate a high number of potential customers. The costs of this service are carried by the seller who must take them into account accordingly when setting his own prices. However, due to the dynamic price-setting process of the English auction and the fee model of eBay, this is only possible to a limited extent. eBay uses a two-part tariff in pricing that consists of a fixed price for listing the auction and commission fees of 2–12% depending on the selling price achieved. Additional services such as a visual highlighting in the search results, an exposed placement of the auction, or the display of several pictures are subject to additional costs. By designing the offer, the seller has a direct influence on the price of the transaction. At the same time, however, the chances of success of the offer also depend on its design. For example, the investment in special auction features can be worthwhile if higher bids are reached in the auction. This dynamic component of the price can only be estimated by the seller through his experience. Besides the auction, other types of offers have also established themselves on eBay. For example, the classic auction can be supplemented by the buy-it-now function that allows the buyer to purchase the product at a fixed price without waiting for the closing of the bidding process. An increasing number of offers, especially from commercial suppliers, are no longer offered as auctions, but exclusively as buy-it-now offers. This type of offer largely corresponds to the classic web shop. The share of these so-called fixed price tradings in the total trading volume of goods traded on eBay is about 90% (eBay 2020d). For the purchase processing of auctions and buy-it-now offers, eBay users have various payment gateways at their disposal. An important system is PayPal. Once the purchase amount has been collected by PayPal, the seller is notified and the goods can be sent. This way, a fast receipt of payment can be realized. In return, the buyer enjoys an additional security during the transaction, as PayPal is liable for a possible delivery failure. The costs for the use of the payment system are again covered exclusively by the seller. Due to the seller-oriented price structure for the use of the platform, eBay was able to achieve broad acceptance among buyers. Additional trust-building measures between buyers and sellers, such as the integrated rating system, have further

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18 Selected Digital Case Studies

enhanced acceptance, thus creating the basis of the success of this digital marketplace. The mass of users is the central argument for using eBay as a sales platform. Sellers accept the transaction costs due to the increased presence of their offers, which can hardly be achieved with a classic web shop.

Spreadshirt Case Study: Digital Products and Digital Services Interactive value creation concepts are playing an increasingly important role in the Internet today. In digital product and program policy, the approaches of open innovation and mass customization are of particular importance. Although the integration of the customer into the innovation and production process is a relatively new field of research, there are numerous examples from business practice that illustrate the importance of these concepts. The company Spreadshirt is a pioneer in the consistent implementation of digital product and program policy in the form of open innovation (Reichwald and Piller 2009). Spreadshirt sells customized T-shirts and other apparel products as well as various accessories such as mugs and key rings throughout Europe and North America. In this connection, their customers not only carry out the individualization in the sense of mass customization but also develop the products and the corporate design of Spreadshirt itself by means of an open innovation approach. For instance, Spreadshirt customers even created the company’s current logo. The core products of the company are T-shirts designed by customers. The company provides the basic product T-shirt. The customers have the possibility to take over the color design as well as the design of printed logos or lettering. They can design the logos by means of a respective graphics program or a tool provided by Spreadshirt on the company’s homepage. This tool is easy and intuitive to use, so every customer is able to participate in the innovation process. In addition, customers can easily start their own online shops with Spreadshirt and sell their self-created products for a commission through Spreadshirt and thereby become a supplier. This gives customers the opportunity to have creations from other customers produced in addition to their own T-shirts. Opening a Spreadshirt shop is just as easy and intuitive as designing the products. This enables a large number of customers to run an online shop, which in turn is the prerequisite for the large number of design innovations. The production of the articles is carried out by means of modern and highly flexible equipment that enables a demand-oriented individual production of T-shirts. As a result, there is no sales risk, neither for the customers acting as suppliers nor for Spreadshirt. Once an order has been placed, the requested T-shirt is produced in the target country by means of digital printing and then shipped from there. The local strategy and efficient processes guarantee fast production and delivery despite the high proportion of manual work involved in T-shirt printing. The company Spreadshirt was founded in 2002 by Lukasz Gadowski as a GbR (civil law company) in Leipzig. Initially, the company faced strong resentments. In

18.2

E-Commerce Cases

703

the course of the downturn of the New Economy, the public and investors were very skeptical about business ideas in the field of digital business, so financing the company was initially quite difficult. Nevertheless, Spreadshirt already had 100 customer shops in January 2002. By 2003, this number had risen to 5000 customer shops and Spreadshirt GmbH (Ltd) was founded. In the course of its rapid growth, Spreadshirt successively developed the online shop functionality and the homepage. In addition, Spreadshirt expanded into various European countries in 2004, including Italy, Spain, and Sweden. At the end of the same year, Spreadshirt Inc. was founded in Louisville, Kentucky, and the company began its US business. A further phase of growth and expansion into Eastern and Southeastern Europe followed (Sprd.net 2020a). The company that was converted to Sprd.net AG in 2006 achieved a turnover of around 110 million EUR in 2018 and shipped over five million articles to more than 170 countries. Over 100,000 partners currently promote their ideas via Spreadshirt in 18 different markets and in 12 languages. Spreadshirt currently operates five production sites and employs over 900 people (Sprd.net 2020b). It is one of the world’s leading e-commerce platforms for on-demand printing of clothing and accessories (Sprd.net 2020a). Spreadshirt’s success is largely due to the consistent implementation of open innovation and mass customization in digital business. Both innovation and variation of products are in the hands of the customers. Spreadshirt simply creates an environment where customers can easily and efficiently implement their ideas. This is a basic necessity for the successful integration of customers into the innovation process. Spreadshirt founder Lukasz Gadowski summarizes the company’s core strategy correspondingly: “We empower users to do their own thing” (Sprd.net AG 2009). Through the possibility to open their own shops and realize even more complicated logos with the relevant know-how in graphic design, Spreadshirt automatically integrates lead users into the product development. Identification and integration of lead users is therefore no longer necessary as they are directly and autonomously integrated into the innovation process via the shop system. Besides satisfying their own needs, lead users also receive rewards in the form of proceeds from the sale of their own innovations, thereby providing further incentives to create innovation. In addition, lead users in particular in the design sector see themselves as trendsetters. Spreadshirt gives these customers the opportunity to create their own trends within the community. This is where the strong community and network orientation of the Spreadshirt platform is clearly apparent, which represents a success factor of the open innovation solution. One important success factor for implementing open innovation in the Spreadshirt case is the product itself. T-shirts and the other simple apparel products in the Spreadshirt catalog represent products with a high degree of popularity and little need for explanation. Both the product itself and the design influenced by the user are characterized by a low degree of complexity. The actual product specification in its function as a clothing item remains unaffected by the customer innovations. Consequently, these

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products are ideally suited for digital product and program policy in general and especially for open innovation or mass customization. Numerous awards for the company and its founder in recent years confirm the success achieved through open innovation. Among other things, Spreadshirt received the HP Business Innovation Award in 2004 and was included in the list of the 100 most innovative companies in Europe by the American business magazine Red Herring one year later. While many digital business companies were struggling with economic problems, Spreadshirt was characterized by strong growth. Accordingly, the company achieved the sixth place in a ranking of the strongest growing European medium-sized companies and the first place among German medium-sized companies in 2006. While Spreadshirt customers—especially those who act as sellers with their own shops—are primarily recruited from young and very Internet-oriented customer segments, the company has already formulated the goal of inspiring the mass market for individualized clothing. Customers, such as Unilever, TV channels, or Doctors Without Borders, already use Spreadshirt’s shop service, and the resulting publicity effect can be interpreted as a first step toward the mass market.

Yahoo Case Study: Digital Communication Yahoo can be cited as an example of a company that has been operating digital communication and especially digital branding for many years. Yahoo is a multinational Internet service provider that serves more than 800 million users worldwide with a wide range of Internet services under one umbrella brand (Yahoo 2020). While Yahoo’s development since the late 2000s has been characterized by numerous setbacks and far-reaching restructuring and reorganization, its comprehensive communication approach and the resulting brand history can be described as unique. Yahoo started as a pure player. The company offered only a single service that consisted of a pure search engine (context). Over time, Yahoo successively expanded its range of products and services and rapidly covered all the main types of business models in digital business. Today, the company’s global network comprises 58 country services and runs offices in Europe, Asia/Pacific, Latin America, Canada, and the United States. The headquarters of this global commerce and brand network that was acquired by the Verizon group in 2016 is located in Sunnyvale, California. Since its foundation in 1994 at Stanford University, the Yahoo brand has gained considerable popularity and a high level of brand awareness among consumers, as not only the brand but also the customer base increased significantly. This brand success of the portal is primarily the result of the clear digital branding strategy that Yahoo has adapted to the changing challenges in the market and its associated

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market position. The demerger of Yahoo and acquisition by Verizon in 2016 marked a cut in Yahoo’s product and service offering and related digital branding strategy. While the focus of Yahoo’s brand identity in the past was to be the leading website that provides customers with content, commerce, connection, and context services, the brand is now positioned as an “amplification brand.” The new brand strategy focuses on making the online experience more individual and personalized. Given the oversupply and information overload on the Internet, Yahoo seeks to strengthen content relevant to the user. This change in strategy is also visually reflected in the rebranding of the new Yahoo logo that was introduced at the end of 2019 and is to be seen as a precursor of a multitude of new products in the next years (Schaffrinna 2019; Pentagram 2020). Yahoo has significantly reduced its previously very broad range of services. The brand covers all major business models (content, commerce, connection, and context) in the digital business context but focuses on the content and services that are particularly important to users in the respective target markets. This well-balanced range of services is said to become a new core asset of Yahoo and forms the basis of its new brand identity and its increasingly individualized and personalized digital communication offers. Yahoo’s core products and services are the email service Yahoo Mail (connection); the search engine Yahoo Search (context); the Yahoo information, news, and entertainment portal (content); and the shopping portal Yahoo Shopping (commerce). The section communication or connection is of great importance to Yahoo, as it is the core area of its market offer model. Yahoo enables digital communication in various chat rooms and via email. Moreover, users can easily build communities and create blogs via the integrated blogging platform Tumblr, in which they can publish texts, images, video, and audio files. Tumblr also allows the so-called reblogging of contributions from other Tumblr blogs, which means that users can publish their own as well as third-party content on their blog. The main focus of Yahoo’s digital communication offer is still email communication. This is particularly reflected in the email app that has been completely revised in 2019. In addition to a graphic redesign with the new Yahoo logo and a new user interface, Yahoo has particularly improved the order and organizational structure of the email inbox. Yahoo’s individualization and personalization strategy is primarily reflected in the new user interface. This interface includes a number of improved customization options for the user, such as the integration of third-party email accounts, customizable push notifications, and personalizable color and tone settings. Context is another central aspect of Yahoo’s market offer model. The search engine Yahoo Search is one of the oldest search engines in the Internet and can therefore be seen as a precursor to Google. Yahoo Search is the most important search engine in the world in terms of market share, after Google and Bing. Yahoo Search is similar to Google and Bing in terms of scope of services and includes

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general web search as well as specialized searches such as image, video, and news search (StatCounter 2020c). Yahoo’s individualization and personalization strategy is reflected in the numerous customization options for web search. For example, users can use the Yahoo Family Filter to filter offensive content from search results or be warned about potentially harmful websites by means of Yahoo’s SearchScan. In addition, Yahoo Search also offers users customization options, like image searches by color preference or filtering news search results by source, which go beyond the offers of other search engines, such as market leader Google. Another major aspect is the integrated access from Yahoo’s search website to other core products and services, such as email and the comprehensive content offers. The content area is of major importance to Yahoo and is the center of Yahoo’s online portal. Yahoo places special emphasis on news (Yahoo News), sports (Yahoo Sports), finance (Yahoo Finance), entertainment (Yahoo Entertainment), and lifestyle (Yahoo Lifestyle). Yahoo News presents the most important headlines and news from around the world based on respected and credible local and national news sources. Yahoo Sports represents another important content area and is Yahoo’s comprehensive sports news and results service. Closely connected to this is Yahoo’s popular fantasy sports offer, where users can put together a virtual team of real-life athletes from a professional league of respective team sports and compete against each other in a contest. Another important content area is the media platform for finance Yahoo Finance that offers the user financial news, press releases, analyses, and financial data, such as stock prices, etc. It also provides users with some online tools for their private financial needs. In addition, Yahoo Entertainment represents Yahoo’s entertainment division in the content area and offers news on areas such as film, TV, music, and celebrities as well as interviews, pictures, videos, and trailers. The last important content area is Yahoo Lifestyle that provides information and trends on topics such as fashion, health, wellness, and beauty. The commerce sector is also a significant element of Yahoo’s market offer model and is strongly based on Yahoo’s content offer. With Yahoo Shopping, Yahoo offers the user a complete shopping portal with many different shop categories and functionalities, such as price comparison, cashback program, or shopping recommendations. There are also personalizable or customizable elements for the user, such as the wish list function or various search filters in the product search. In addition, Yahoo provides its own sales platform for sporting goods with the Yahoo Sports Shop and distributes its own Yahoo brand collection of clothing, office supplies, sporting goods, and many other product groups via the Yahoo Purple Shop. Yahoo also offers another e-commerce platform, the Yahoo Lifestyle Shop, that is closely linked to the corresponding content area and sells products and services on various lifestyle trends. In order to live up to the international character of the company and its own aspiration of a global brand identity, Yahoo provides access to essential Yahoo

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content and services in a variety of languages and users can switch to the individual website of their country with a single click. This reflects another principle of Yahoo’s branding strategy: Yahoo acts on a global scale and its services can be used all over the world but at the same time provides a country-specific, target market-oriented offer. In addition, Yahoo creates lock-in effects in connection with its various personalization offers. This can be demonstrated by the example of Yahoo’s My Channel. My Channel allows users to create their own video channel. Thereby, the users can select preferred sports teams, celebrities, and companies and receive a personalized video program on a daily basis. As this personalization requires a certain amount of effort from the users, Yahoo generates a real lock-in effect. This increases the cost of switching to a different provider for the customers, binding them to the company or the Yahoo brand. In summary, although the discontinuation of many products and services has significantly reduced the range of offers, Yahoo continues to offer users an integrated and balanced range of products and services by covering the key digital business model areas of connection, context, content, and commerce. As part of its amplification strategy, Yahoo focuses on strengthening and improving its core products and services and thus on those aspects that are most relevant to the users. The fact that all services can be accessed from the Yahoo portal page increases the consistent look and feel and facilitates navigation for the user. This highlights and strengthens the brand, which increases customer loyalty and user numbers. In addition to the balanced range of products and services, the core of Yahoo’s brand strategy is always to focus on the customer and the community. In order to create awareness of the Yahoo brand and the associated products and services, on the one hand, and to strengthen their identity and trustworthiness, on the other, Yahoo relies on long-term and sustainable brand advertising. In this context, Yahoo distinguishes in particular the offers Yahoo Mail, Yahoo Search, Yahoo Shopping, Yahoo News, Yahoo Sports, Yahoo Finance, Yahoo Entertainment, and Yahoo Lifestyle. In order to establish the brand, Yahoo pursued consistent advertising in online and offline media as well as selected online sponsoring in the past and introduced extensive affiliate programs. As a result, Yahoo created an individual brand interest that could be further expanded through the targeted use of the digital communication instruments. Against the background of the resulting high level of brand awareness and high user numbers, Yahoo now advertises its products and innovations primarily on its own online portal. Moreover, direct communication by email and newsletter as well as smart public relations also ensures sustainable customer care. Furthermore, Yahoo relies on cooperation with established brands within brand advertising to improve the marketing of its own products and services. To provide extended content and services to its own customers, Yahoo cooperates worldwide with well-known companies from almost all industries, such as ABC News, NBC Sports, and Microsoft Bing.

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Innovative companies can quickly achieve a high presence on the Internet through an e-commerce partnership with Yahoo. The co-branding strategy and the combined marketing of the Yahoo brand with other well-known products and companies will further enhance Yahoo’s brand awareness. Co-branding is used in particular for contrasting products in order to expand the target group by using the other brand in each case. Yahoo itself not only represents an interesting co-branding partner for other companies but is also seen as an attractive and promising advertising platform, especially due to its high reach. Accordingly, the Yahoo online portal is actively marketed by Verizon Media as an advertising platform. The Yahoo ad.com advertising network can reach approximately one billion customers worldwide on Yahoo, AOL, and other Verizon Media websites. In advertising marketing, Verizon Media highlights Yahoo Mail, Yahoo Finance, Yahoo Entertainment, Yahoo Lifestyle, Yahoo News, Yahoo Fantasy, and Yahoo Sports as advertising platforms in addition to the umbrella brand Yahoo. One of Yahoo ad.com’s core services for its advertising customers is the simple creation of advertising media and, in particular, the highly developed targeting and tracking system. This allows an adequate target group determination within advertising campaigns and enables an analysis of the campaign performance and the control of the advertising success (Verizon Media Group 2020b). This integrated marketing offer enables advertisers to carry out flexible and efficient advertising campaigns in a quick and easy manner, thus offering them a considerable added value. Due to the increasing banner blindness of online users and the resulting decline in clicks on online advertising banners, Yahoo is increasingly turning to native advertising. In 2014, Yahoo launched the advertising platform Yahoo Gemini, now known as Verizon Media Native, the first unified platform for native advertising and mobile search advertising (Schiff 2015; Verizon Media Group 2020a). Native advertising is becoming increasingly important in online marketing, as the associated advertising media can hardly be distinguished from editorial content and thus attract more attention from users than classic online advertising. Yahoo has a significant reach in the Internet, which is reflected in approximately 1 billion active online users per month, over 165 billion daily intent signals, and 2 billion ad impressions per day (Verizon Media Group 2020a). Furthermore, Yahoo’s search engine provides an attractive advertising platform for companies. In the search business, Yahoo has a long-standing partnership with Microsoft Bing. Meanwhile, not only the organic search results in Yahoo’s search engine originate from Microsoft Bing but also the paid search results. Microsoft Bing Ads is thus the exclusive search advertising platform for Yahoo that benefits from the advertising revenue generated within this partnership. In addition, Verizon Media exploits Yahoo search engine results by itself by offering the Yahoo Search XML feed to other companies for use (Verizon Media Group 2020a). In summary, when it comes to brand advertising and advertising marketing, Yahoo or Verizon Media pursues the strategy of managing all service offers under

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the umbrella brand Yahoo. This is illustrated, for instance, by Yahoo Mail, Yahoo Finance, Yahoo News, and Yahoo Sports. This umbrella brand strategy reduces the risk of failure for new product launches and accelerates acceptance among consumers. This creates a unique brand identity. Each individual product or service consequently contributes to the promotion and support of the Yahoo umbrella brand. With all products combined under one umbrella brand, Yahoo creates trust, security, and loyalty among its customers. These quality factors seem to be essential to online brands in comparison to brands in the traditional economy, where significantly more testing qualities and tangibility of products are available. However, the continuous expansion of service offers for customers also contains communication and brand-related risks. A large number of offers may weaken the core brand as users may no longer recognize which product the Yahoo brand stands for. In addition, brand erosion may occur where the customer no longer accepts the company’s claim of competence for all products. Likewise, there is a risk of badwill transfer, as products of different quality may cause negative spillover effects. Yahoo has countered these risks by deliberately reducing its product range in recent years and enforcing a change in strategy in terms of strengthening its core content and services. Overall, disregarding commercial evaluation criteria, Yahoo has built a balanced and integrated product and service offer through the proper use of digital communication tools and through numerous strategic partnerships, establishing a globally known online brand.

Amazon Case Study: Digital Customer Relationship Management Amazon started selling books over the Internet in July 1995. The company soon became a leading online shopping provider, offering books, CDs, videos, DVDs, toys, digital goods, software, cosmetics, kitchen accessories, and jewelry. Amazon is now considered the world’s largest online retailer and provider of cloud computing infrastructure. The company offers a wide range of products via its marketplace and allows manufacturers to sell their products via this platform. In this context, Amazon also offers payment, packaging, and logistics services (Amazon 2020b). The services are partly provided in cooperation with partner companies, such as Siemens and Volkswagen for the cloud services sector. For the year 2019, Amazon reported a revenue of 280 billion USD, which corresponds to a 20% year-on-year growth in sales (Amazon 2020a). The company’s development into the leading online shopping provider mainly results from the consistent implementation and realization of activities in customer relationship management. Amazon integrates various instruments to create a comprehensive customer care mix. One of the most significant instruments is probably Amazon’s recommendation system.

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This recommendation system is based on collaborative filtering and data mining. In order to give customers purchase recommendations, Amazon analyzes their shopping behavior, considering in particular the products purchased earlier. The customer’s purchasing behavior is then compared with the shopping behavior of fellow customers in order to identify other customers with similar interests (Hardesty 2019). Based on the data about the customer’s own purchasing behavior and that of similar customers, Amazon makes recommendations to the customer. In the majority of cases, the recommendation actually corresponds to the customer’s interests, so that the method of collaborative filtering indeed allows the company to make individualized offers to its customers. The recommendation system is considered to be the most powerful marketing tool and one of the main reasons for Amazon’s growth in sales. According to the company, a large number of customers purchase additional products in the form of impulse purchases based on the recommendations (Hardesty 2019). Another instrument of customer retention at Amazon represent user reviews. Customers write reviews about purchased products, which are intended to help other customers in their decision-making. In the context of customer loyalty activities, these reviews serve, on the one hand, to establish (social) community elements and, on the other, to directly initiate (additional) sales. Community elements are particularly established through the reviews, as customers can actively contribute their own content. This leads to increased communication between customers and to a close (social) relationship with Amazon. Besides establishing community elements, user reviews can also initiate additional sales. Product reviews from private users are often perceived as more trustworthy than those from Amazon itself. The reviews can thus often motivate customers who are still hesitant to purchase a certain product. The reviews are also a reason for many people to visit Amazon’s website to inform themselves about specific products. These products are then also often purchased on Amazon. Besides these specific instruments of CRM, Amazon also applies other instruments of digital CRM. For instance, a customer who has registered once is addressed and welcomed by name when accessing the website again. Features such as the individual wish list or the gift service also support customer relationship management. The personal wish list allows users to select items from the Amazon offer that they would like to receive as gifts. Friends and relatives can buy the items directly from this list and have them sent to the corresponding addressee. In addition, the gift service allows sending gift vouchers. Moreover, items can be packed as gifts and delivered directly to the recipient. The Amazon Associates Program can also be considered as an instrument of digital CRM. Customers are encouraged to set up a web shop for Amazon on their personal websites. The incentive is a reward of up to 10% of the sales processed via these pages as well as an increased attractiveness of the own Internet presence. Thus, Amazon binds the associate with this program and benefits from the multiplication of referrals via the associates.

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Amazon Prime is a further instrument of customer loyalty management. It is an additional Amazon service for which a fee is charged. Amazon Prime members, for example, do not have to pay order fees for many products and have access to extensive additional offers, such as movies, music, and books. These special advantages increase customer loyalty. The large number of customer loyalty efforts at Amazon has contributed significantly to the company’s success. Amazon focuses not exclusively on the acquisition of new customers, which is associated with extraordinarily high costs, but rather on strong customer loyalty. Figure 18.10 provides a summary overview of the digital CRM instruments used by Amazon.

Instruments of Digital CRM at Amazon

Recommendation System

User Reviews

Others

• Submission of individual product recommendations

• Customers review products that they have purchased

• Personalized welcome of registered customers on the website

• Customized to the interests and preferences of customers

• Establishment of community elements

• Value-added service (e.g. personal wish list)

• Increased credibility of reviews

• Amazon Associate Program

• Technically based on collaborative filtering

Fig. 18.10 Digital CRM at Amazon. Source: Wirtz (2010b)

UBS Case Study: Digital Procurement In the following, the potential benefits of digital procurement are explained using a practical example. Therefore, the procurement solution “myShop” will be presented, which UBS AG has developed and implemented in cooperation with Conextrade and SAP. The system was launched in 2002 and has been one of the leading digital procurement solutions in the European banking sector since its introduction (Lüthy 2002; Weber and Tanner 2009). UBS is one of the world’s leading financial institutions. The company is one of the leading providers of wealth management services, one of the largest asset managers, and one of the largest international financial institutions in investment banking and securities. In Switzerland, UBS is the market leader in private and corporate banking. It is active in 50 countries and employs approximately 68,000 people worldwide (UBS AG 2020). There is a high level of competitive pressure both nationally and internationally, which has led banks to engage in digital business at an early stage. Initially, the focus was on the sales side (digital banking), later increasingly on the procurement side. At

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UBS, the transformation from traditional procurement to digital procurement took place in two stages. UBS procures capital goods, materials, and services in Switzerland for approximately 2.5 billion EUR annually. Until the introduction of digital procurement solutions, procurement was organized on a decentralized basis. Many goods were therefore procured by specialized departments, such as IT, marketing, and logistics, themselves. The actual procurement department had to supervise 3200 suppliers, but with a procurement volume of approximately 250 million EUR, it only accounted for a small proportion of the total volume. A rationalization project in 1998 led to the outsourcing of office supplies to approximately 200 suppliers. It proved to be insufficient, which is why a computersupported solution was sought to increase efficiency in procurement. In 1999, the first completely automated digital procurement solution “GATE” was implemented on the basis of the existing enterprise resource planning (ERP) system SAP/R3, which was the leading ERP system for large companies at that time (under the name mySAP) (SAP AG 2020a). The system has been developed into a real-time ERP suite (called SAP S/4HANA) that allows working via clouds or on site. While the modular structure of the original system remains, the modules have been expanded. The modules MM (materials management) and SD (sales and distribution) were replaced by marketing and sales, business planning, consolidation, and production. In the course of the “GATE” implementation, the supply of office consumables was concentrated on only four partners who were connected to the new system via EDI interfaces. This provided 4000 material managers access to an extensive catalog and enabled the processing of up to 1000 orders. However, at around 12.5 million EUR, the procurement volume was only about 0.5% of the total procurement volume. Still 65.8% of the procurement was processed decentrally. Figure 18.11 illustrates the procurement situation of UBS Switzerland in 2001.

Procurement via SAP/R3

9.2%

Digital procurement

0.5%

Other vendor invoices

24.5%

Other procurement

65.8%

0%

10%

20%

30%

40%

50%

Fig. 18.11 Procurement situation of UBS in 2001. Data source: Lüthy (2002)

60%

70%

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A benchmarking study by the University of St. Gallen conducted during this period revealed a great potential for optimization in terms of MRO (maintenance, repair, and operations) procurement. High procurement costs and long process times due to manual interfaces, media breaks, and data redundancy were identified as core problems of the existing system. Other points of criticism were highly fragmented procurement processes and the time-consuming and labor-intensive compilation of management information. Besides already implemented IT-supported systems, the original procurement channels continued to be used in parallel, which is due to low acceptance on the user side caused by excessively complex operation. The study results led to the decision to generate a lean digital procurement solution. Conextrade, the operator of the first and today’s largest digital horizontal trading place in Switzerland, was responsible for the planning and implementation (Swisscom AG 2020b). Besides purchasing, sales, and catalog management, at the same time young trading place also offers consulting services, transaction management, and additional digital services. In cooperation with the procurement partner Conextrade, clear specifications were formulated for the new system. The basic objective was a general increase in procurement efficiency with full integration into the existing SAP backend system. The increase in efficiency should primarily be achieved by automating the ordering, approval, and invoice processing as well as implementing best practice procurement processes without media breaches. The integration into the existing SAP system should ensure consistent order management, increased cost transparency, and improved cash management. In the medium term, approximately 400 suppliers are scheduled to be connected to the solution. The digital procurement system “myShop” that was implemented as an integrated buy-side solution with a multi-supplier catalog and connection to a digital trading center meets all the requirements of an international corporation. A system integrated into the existing system architecture of UBS creates an artificial buy side and manages access to external interfaces. According to the division into different forms of interaction, the “myShop” system can therefore be described as a punch-out or round-trip solution. This solution is characterized by the fact that an internally completely integrated software obtains current catalog information externally. While no further components are required with the new SAP system S/4HANA, UBS used SAP internally with an additional procurement component, enterprise buyer professional (EBP), when introducing “myShop.” The EBP component contains a cross-company, completely digital handling of the procurement process of production-independent goods (SAP AG 2020b). It is directly linked to the materials management system and its functionalities, such as financial accounting. This results in various advantages for the procuring company. A direct connection to SAP avoids system breaks. Rules such as procurement or approval competence are stored in the system and considerably reduce administrative effort. The browser-based system offers a similarly simple and intuitive functionality as a web shop. This is one of the main advantages over the SAP/R3 MM

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and SD-supported solution that was in place prior to the “myShop” introduction. Conducting purchase orders and documenting arrival of goods and vendor invoices are performed automatically within the system and will be validated against the backend system. The internal systems at UBS allow a direct connection via SAP to the digital marketplace Conextrade. This is where the purchasing catalogs, whose data is provided by the likewise connected suppliers Conextrade and UBS itself, are managed. Business documents are also exchanged via the marketplace. As usual for a marketplace, Conextrade also works according to the many-to-oneto-many principle. The platform focuses on the procurement of MRO and C-goods and services with a cross-sector portfolio (Swisscom AG 2020b). Many advantages for UBS result from choosing a system solution with a digital marketplace and outsourcing central procurement functions to the marketplace operator. These include increased market transparency, reduced transaction costs and purchase prices, faster response times, and an increased supplier base. The “myShop” solution ensures a uniform design of the catalogs, thus avoiding the disadvantages of a sell-side solution. Only one interface and one data format are needed, since communication always takes place via the marketplace. This significantly reduces system complexity on the procurement side. Due to the strong system integration and punch-out functionality, many of the classic disadvantages of a pure marketplace solution are excluded, although a number of risks still occur in this context. Especially in the long run, the close connection to the marketplace Conextrade may lead to a dependency. Moreover, the success of the solution depends on a sufficient number of suppliers participating in the marketplace. As a large corporation, UBS uses its market power to encourage its own suppliers to connect to the marketplace. A limitation that is particularly important for an internationally active group like UBS is the local focus of the solution. A further digital worldwide procurement of MRO and C-goods by UBS involves additional procurement partners. The “myShop” system offers considerable advantages in terms of the strategic aspects of procurement. The procurement department can focus on the procurement of A- and B-goods. Due to the possibility to negotiate framework agreements, authorized procurement officers can independently perform the procurement of MRO goods within the company. If necessary, release procedures are automatically initiated and lead to a further relief of administrative tasks. Warehousing and distribution can be largely externalized through demand-oriented procurement. The reduction to a single interface and outsourcing of IT capacity to the marketplace operator unlock considerable savings potential in the IT area. These advantages are also reflected in the employment numbers in the procurement area shown in Fig. 18.12.

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190 70 „

Fig. 18.12 UBS procurement employees before and after the introduction of digital procurement. Data source: Lüthy (2002)

The digital procurement solution “myShop” has proven to be an efficient way of purchasing a wide range of goods and services for UBS. UBS now handles a large part of its procurement volume digitally. Although the investment of around five million EUR for the entire system amortized more slowly than planned, UBS realized substantial savings potential (Weber and Tanner 2009). The head of procurement Switzerland at UBS AG notes that the introduction of the Conextrade trading center has significantly reduced the number of suppliers required as well as the costs of the procurement process (Swisscom IT Services AG 2008) UBS’s medium-term goal is to automate the ordering, approval, and invoicing processes for all non-production goods. The Conextrade marketplace also has a growing number of participating companies and a high level of realized business relationships (Swisscom AG 2020a).

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The textbook starts with a historical retrospective: “For some time, there has been an essential change within the economy and society induced by information technology. This change is mainly caused by increasing digitization: “With the beginning of the ‘digital age’, also called ‘digital revolution’, which evolved throughout the development of the multimedia market, there will be a fundamental change of existing structures in the telecommunication, computing, entertainment and media industries” (Denger and Wirtz 1995b). This assessment in 1995 aptly illustrates the impact of digitization” (Wirtz 2021, p. 4). At that time, I worked as a consultant in the strategy consulting division of Accenture and was full of enthusiasm about the great potential and opportunities of the digital revolution. In the course of the digital journey toward the information society over the last two decades, my perceptions and views have also significantly changed. Since the first edition of this textbook in German in the year 2000, digitization has accomplished an unimagined triumph in the economy and society. The comprehensive and far-reaching digitization of our spheres of life provides a variety of benefits for our lives. However, there are also fundamental developments in the digital realm that give cause for concern (see also Fig. 19.1). Challenge 1: Digital Divide The first important challenge concerns the digital divide in our society. Access to the Internet and the use of digital opportunities should be open and unrestricted for everyone in our society, regardless of social and economic circumstances. Today, education, information, and communication have largely become a digital commodity, which presupposes fundamental and fair equality of opportunity in terms of access and use. Digital open access is therefore constitutive of an open and democratic society. Challenge 2: Digital Surveillance State A second challenge refers to the danger of a “digital surveillance state.” The possibilities of digital surveillance by government institutions are very pronounced # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 B. W. Wirtz, Digital Business and Electronic Commerce, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-63482-7_19

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The Digital Future: A Brief Outlook

Digital Divide

Digital Automation and Robotization

Digital Surveillance State

Digital Future Challenges

Digital Economization and Concentration

Digital Governance and Regulation Informational SelfDetermination and Privacy

Fig. 19.1 Digitial future challenges

in a digitally dominated and data-driven society. A large number of countries around the world already have very extensive digital surveillance of citizens in place. The analysis of widely established surveillance cameras with facial and motion recognition software in combination with the analysis of digital communication such as email, social media, blogs, or messenger chats by means of AI-based big data analytics enables government institutions to obtain a comprehensive picture of every citizen. On this basis, government institutions can carry out very restrictive behavioral control and sanctioning actions (e.g., based on a social credit system). Here, the abuse of digital technology, for instance, by authoritarian regimes is an important topic of discussion in our society.1 Challenge 3: Digital Economization and Concentration A third challenge concerns digital economization and concentration. In the last two decades, very powerful digital champions such as Google, Facebook, Amazon, Microsoft, Apple, Alibaba, or Tencent have emerged worldwide. These global players pursue data-driven business models. Often, private data of users is collected to use for the economic benefit of the company.2 Big data and AI technology are For further reading, I recommend the book “1984” by George Orwell (2008). For further reading, I recommend the book “The Age of Surveillance Capitalism: The Fight for the Future at the New Frontier of Power” by Shoshana Zuboff (2019). 1 2

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often used in combination to collect and analyze data about people’s personal preferences and behavior in order to model predictive behavior patterns and influence them in a targeted manner (digital behavior modification). Digital search engines, large digital marketplaces, and social media are of considerable importance in this context. One example is the targeted influencing of voters in the 2016 U.S. presidential election by means of data from Facebook and Cambridge Analytica. Due to the enormous market power of digital companies, market developments that are dangerous in terms of competition law will increasingly arise in the future. Moreover, this digital market concentration and competition are leading to a significant profit and value migration in our economy and society in favor of a few highly profitable companies. In particular, digital intermediaries such as Uber or Airbnb are leading to disruptions of value constellations that will permanently change our economy and society. Challenge 4: Informational Self-determination and Privacy A fourth challenge concerns the informational self-determination and privacy of citizens and consumers. The digital world and in particular the digital champions collect a myriad of data usually in exchange for providing free services, like Facebook or Google. The data is collected very intelligently and systematically from the “data owners” without their full understanding regarding the scope and commercialization of the data. In this connection, it is absolutely necessary to improve people’s digital awareness of these processes through education and training, and to intensify digital governance. Challenge 5: Digital Governance and Regulation This leads to the fifth important challenge in the form of digital governance and regulation. The digital world has been able to develop largely free of public governance and regulation over the past 20 years. In the meantime, the legal design and regulation of the “Wild West” Internet has begun to some extent, for instance, with the European Union General Data Protection Regulation and the political debate on the regulation of the market power of digital champions, such as Google and Facebook. Here, particularly the governance of digital personal data, digital disinformation (fake news), and digital hacking (digital crime) are of paramount importance to our society, as well as the fair taxation of digitally generated corporate profits. Challenge 6: Digital Automation and Robotization The sixth challenge that is of great importance for the future concerns digital automation and robotization. The interplay of big data, increasingly powerful AI, and leaps in robotic development will dissolve considerable parts of our working world in the future. Previously human tasks will be carried out by AI and intelligent robots. This workforce substitution will lead to an unprecedented release of labor. The mass unemployment that may arise in this context will lead to significant problems for our society that will require forward-looking and intelligent governance. In a not-too-distant future, the question of how our society should deal with

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(independent!) intelligent machines and robots will also increasingly arise. Not only James Cameron’s Terminator movies show the dangers of AI-based autonomous technology. So-called cyberwars are a scenario that can occur in a real-world context today, given the fundamental work such as that of the world’s leading robotics company Boston Dynamics. Against the background of these six important aspects, social and governmental institutions must comprehensively and integratively accompany and actively shape the future digital development in an open and democratic social context. Only the greatest possible transparency, participation, and fairness will make an information society viable.

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