Objectives of knowledge management

Bargaining power of 
buyers
Bargaining power of 
suppliers
Threat of substitute 
products and 
services
Barriers to entry
Rivalry amongst 
existing competitors
• The power of 
online buyers is 
increased since 
they have a wider 
choice and prices 
are likely to be 
forced down 
through increased 
customer 
knowledge 
and price 
transparency, i.e. 
switching behaviour 
is encouraged.
• For a B2B 
organisation, 
forming 
electronic links 
with customers 
may deepen a 
relationship and 
it may increase 
switching costs, 
leading to ‘soft 
lock‑in’.
• When an 
organisation 
purchases, the 
bargaining power 
of its suppliers is 
reduced since there 
is wider choice 
and increased 
commoditisation due 
to e‑procurement 
and digital 
marketplaces.
• The reverse 
arguments also 
apply as for 
bargaining power of 
buyers.
• Commoditisation 
reduces 
differentiation of 
suppliers.
• E-procurement can 
reduce switching 
costs, although use 
of preferred systems 
can achieve lock‑in.
• Substitution is a 
significant threat 
since new digital 
products or 
extended products 
can be more 
readily introduced.
• The introduction 
of new substitute 
products and 
services should be 
carefully monitored 
to avoid erosion of 
market share.
• Internet 
technology 
enables faster 
introduction of 
products and 
services.
• This threat is 
related to new 
business models 
which are covered 
in a later section in 
this chapter.
• Barriers to entry 
are reduced 
through lower fixed 
costs, enabling 
new competitors, 
particularly for 
retailers or service 
organisations that 
have traditionally 
required a high‑ 
street presence or a 
mobile sales force.
• New entrants 
must be carefully 
monitored to avoid 
erosion of market 
share.
• Internet services are 
easier to imitate than 
traditional services, 
making it easy for 
‘fast followers’. The 
cost of establishing 
a recognised, 
trusted brand is 
a major barrier 
or cost of entry 
and new entrants 
have to encourage 
customers to 
overcome switching 
costs.
• The Internet 
encourages 
commoditisation 
which makes it less 
easy to differentiate 
products.
• Rivalry becomes 
more intense as 
product life cycles 
shorten and lead 
times for new 
product development 
decrease.
• The Internet 
facilitates the move 
to the global market 
with potentially 
lower cost‑ base also 
potentially increasing 
the number of 
competitors.
market development. These new entrants have been able to succeed in a short time since they 
do not have the cost of developing and maintaining a distribution network to sell their prod-
ucts and these products do not require a manufacturing base. In other words, the 
barriers 
to entry
are low. However, to succeed, new entrants need to be market leaders in executing 
marketing and customer service. The costs of achieving these will be high. This competitive 
threat is less common in vertical business-to-business markets involving manufacture and 
process industries such as the chemical or oil industry since the investment barriers to entry 
are much higher.
2
 
Threat of new digital products
This threat can occur from established or new companies. The Internet is particularly good 
as a means of providing information- based services at a lower cost. The greatest threats are 
likely to occur where digital product fulfilment can occur over the Internet, as is the case 
with delivering share prices, digital media content or software. This may not affect many 
business sectors, but is vital in some, such as newspaper, magazine and book publishing, and 
music and software distribution. In photography, Kodak tried to respond to a major threat 
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Chapter 5
Digital business strategy
of reduced demand for traditional film by increasing its range of digital cameras to enhance 
this revenue stream and by providing online services for customers to print and share digital 
photographs. Ultimately these approaches weren’t successful. The extent of this threat can be 
gauged by a review of product in the context of Figure 5.10.
3
 
Threat of new business models
This threat can also occur from established or new companies. It is related to the competitive 
threat in that it concerns new methods of service delivery. The threats from existing com-
petitors will continue, with the Internet perhaps increasing rivalry since price comparison is 
more readily possible and the rival digital businesses can innovate and undertake new prod-
uct development and introduce alternative business and revenue models with shorter cycle 
times than previously. This again emphasises the need for continual environment scanning. 
(See the section on business and revenue models in Chapter 2 for examples of strategies that 
can be adopted in response to this threat.)
 Sell‑ side threats
1
 
Customer power and knowledge
This is perhaps the single biggest threat posed by electronic trading. The bargaining power of 
customers is greatly increased when they are using the Internet to evaluate products and com-
pare prices. This is particularly true for standardised products that can be compared through 
price comparison engines. For commodities, auctions on business-to-business exchanges 
can also have a similar effect of driving down price. Purchase of some products that have not 
traditionally been thought of as commodities may become more price- sensitive. This process 
is known as ‘
commoditisation
’. Examples of goods that are becoming commoditised are 
electrical goods and cars. (The issue of online pricing is discussed in Chapter 8.)
In the business-to-business arena, a further issue is that the ease of use of the Internet 
channel makes it potentially easier for customers to swap between suppliers – switching costs 
are lower. With a specific EDI (electronic data interchange) link that has to be set up between 
one company and another, there may be reluctance to change this arrangement (
soft lock‑in
due to switching costs). Commentators often glibly say ‘online, your competitor is only a 
mouse click away’, but it should be remembered that soft lock-in still exists on the web – 
there are still barriers and costs to switching between suppliers since, once customers have 
invested time in understanding how to use a website to select and purchase a particular type 
of product, they may not want to learn another service.
2
 
Power of intermediaries
A significant downstream channel threat is the potential loss of partners or distributors if 
there is a channel conflict resulting from 
disintermediation
(Chapter 2, p. 53). The tensions 
between intermediaries, and in particular aggregators and strategies to resolve them, are 
shown by the public discussion between direct insurer Direct Line (
www.directline.com
) and 
aggregator Moneysupermarket (
www.moneysupermarket.com
) in Box 5.1.
Box 5.1
The balance of power between brands and aggregator sites
Guardian
(2007) reported on an ongoing spat which saw Direct Line disparaging com‑
parison engines like Moneysupermarket, Confused.com and Go Compare in a multi‑ 
million‑ pound TV campaign. It reported Roger Ramsden, strategy director for Royal 
Bank of Scotland Insurance, which owns Direct Line, as saying:
Direct Line has never been available through a middleman of any sort and never will 
be, and that’s what these [comparison] sites are. They are commercial operations 
Commoditisation
The process whereby 
product selection 
becomes more 
dependent on price than 
differentiating features, 
benefits and value‑ added 
services.
Soft lock‑in
Electronic linkages 
between supplier and 
customer increase 
switching costs. 
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Part 2
Strategy and applications
rather than a public service, and the [advertising] campaign is responding to our 
customers who tell us they are unaware of this and find the sites confusing.
His assertion is partially true in that although Moneysupermarket covers approximately 
80% of the motor insurance market, it does not list quotes from some large insurers 
such as Norwich Union or other insurers owned by the Royal Bank of Scotland, includ‑
ing Direct Line, Churchill, Privilege and Tesco Personal Finance.
In a counter‑ argument, Richard Mason, director of Moneysupermarket.com, said 
that Direct Line’s campaign:
smacks of complete desperation. We are the new kids on the block and Direct Line 
don’t like it. They have lost their market share since we came on the scene – they 
were in a position where consumers thought they were competitive and kept renew-
ing their policies. They spent hundreds of millions of pounds on advertising. But now 
consumers can find cheaper alternatives and are doing so in their droves.
Data from Hitwise (2006) supports Moneysupermarket’s position. It suggests this site 
achieves around a third of its visits from price‑ sensitive searchers looking to compare 
by typing generic phrases such as ‘car insurance’, ‘cheap car insurance’ and ‘compare 
car insurance’. It has also invested in traditional advertising through TV, print and out‑
door media to increase brand awareness.
An additional downstream threat is the growth in number of intermediaries (another 
form of partner) to link buyers and sellers. These include consumer portals such as Bizrate 
(
www.bizrate.com
) and business-to-business exchanges such as EC21 (
www.ec21.com
). If 
a company’s competitors are represented on a portal while the company is absent or, worse 
still, they are in an exclusive arrangement with a competitor, this can potentially exclude a 
substantial proportion of the market.
 Buy‑ side threats
1
 
Power of suppliers
This can be considered as an opportunity rather than a threat. Companies can insist, for 
reasons of reducing cost and increasing supply chain efficiency, that their suppliers use elec-
tronic links such as EDI or Internet EDI to process orders. Additionally, the Internet tends to 
reduce the power of suppliers since barriers to migrating to a different supplier are reduced,