The factor proportions model was originally developed by two Swedish economists, Eli Heckscher and his student Bertil Ohlin in the 1920s. Many elaborations of the model were provided by Paul Samuelson after the 1930s and thus sometimes the model is referred to as the Heckscher-Ohlin-Samuelson (or HOS) model. In the 1950s and 60s some noteworthy extensions to the model were made by Jaroslav Vanek and so occasionally the model is called the Heckscher-Ohlin-Vanek model. Here we will simply call all versions of the model either the “Heckscher-Ohlin (or H-O) model” or simply the more generic “factor-proportions model”.

The H-O model incorporates a number of realistic characteristics of production that are left out of the simple Ricardian model. Recall that in the simple Ricardian model only one factor of production, labor, is needed to produce goods and services. The productivity of labor is assumed to vary across countries which implies a difference in technology between nations. It was the difference in technology that motivated advantageous international trade in the model.

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The standard H-O model(1) begins by expanding the number of factors of production from one to two. The model assumes that labor and capital are used in the production of two final goods. Here, capital refers to the physical machines and equipment that is used in production. Thus, machine tools, conveyers, trucks, forklifts, computers, office buildings, office supplies, and much more, is considered capital.

All productive capital must be owned by someone. In a capitalist economy most of the physical capital is owned by individuals and businesses. In a socialist economy productive capital would be owned by the government. In most economies today, the government owns some of the productive capital but private citizens and businesses own most of the capital. Any person who owns common stock issued by a business has an ownership share in that company and is entitled to dividends or income based on the profitability of the company.

As such, that person is a capitalist, i.e., an owner of capital.

The H-O model assumes private ownership of capital. Use of capital in production will generate income for the owner. We will refer to that income as capital “rents”. Thus, whereas the worker earns “wages” for their efforts in production, the capital owner earns rents. The assumption of two productive factors, capital and labor, allows for the introduction of another realistic feature in production; that of differing factor-proportions both across and within industries. When one considers a range of industries in a country it is easy to convince oneself that the proportion of capital to labor used varies considerably.

For example, steel production generally involves large amounts of expensive machines and equipment spread over perhaps hundreds of acres of land, but also uses relatively few workers. In the tomato industry, in contrast, harvesting requires hundreds of migrant workers to hand-pick and collect each fruit from the vine. The amount of machinery used in this process is relatively small. In the H-O model we define the ratio of the quantity of capital to the quantity of labor used in a production process as the capital-labor ratio. We imagine, and therefore assume, that different industries, producing different goods, have different capital-labor ratios. It is this ratio (or proportion) of one factor to another that gives the model its generic name: the factor-proportions model. In a model in which each country produces two goods, an assumption must be made as to which industry has the larger capital-labor ratio. Thus, if the two goods that a country can produce are steel and clothing, and if steel production uses more capital per unit of labor than is used in clothing production, then we would say the steel production is capital-intensive relative to clothing production.

Also, if steel production is capital-intensive, then it implies that clothing production must be labor-intensive relative to steel. MORE INFO Another realistic characteristic of the world is that countries have different quantities, or endowments, of capital and labor available for use in the production process. Thus, some countries like the US are well-endowed with physical capital relative to its labor force. In contrast many less developed countries have very little physical capital but are well-endowed with large labor forces. We use the ratio of the aggregate endowment of capital to the aggregate endowment of labor to define relative factor abundancy between countries. Thus if, for example, the US has a larger ratio of aggregate capital per unit of labor than France’s ratio, we would say that the US is capital-abundant relative to France. By implication, France would have a larger ratio of aggregate labor per unit of capital and thus France would be labor-abundant relative to the US. MORE INFO The H-O model assumes that the only difference between countries is these differences in the relative endowments of factors of production.

It is ultimately shown that trade will occur, trade will be nationally advantageous, and trade will have characterizable effects upon prices, wages and rents, when the nations differ in their relative factor endowments and when different industries use factors in different proportions. It is worth emphasizing here a fundamental distinction between the H-O model and the Ricardian model. Whereas the Ricardian model assumes that production technologies differ between countries, the H-O model assumes that production technologies are the same. The reason for the identical technology assumption in the H-O model, is perhaps not so much because it is believed that technologies are really the same; although a case can be made for that. Instead the assumption is useful because it enables us to see precisely how differences in resource endowments is sufficient to cause trade and it shows what impacts will arise entirely due to these differences. The Main Results of the H-O Model There are four main theorems in the H-O model; the Heckscher-Ohlin theorem, the Stolper-Samuelson Theorem, the Rybczynski theorem, and the factor-price equalization theorem. The Stolper-Samuelson and Rybczynski theorems describe relationships between variables in the model while the H-O and factor-price equalization theorems present some of the key results of the model. Applications of these theorems also allows us to derive some other important implications of the model.

Let us begin with the H-O theorem. The Heckscher-Ohlin Theorem The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries. The H-O theorem says that a capital-abundant country will export the capital-intensive good while the labor-abundant country will export the labor-intensive good. Here’s why. A capital-abundant country is one that is well-endowed with capital relative to the other country.

This gives the country a propensity for producing the good which uses relatively more capital in the production process, i.e., the capital-intensive good. As a result, if these two countries were not trading initially, i.

e., they were in autarky, the price of the capital-intensive good in the capital-abundant country would be bid down (due to its extra supply) relative to the price of the good in the other country. Similarly, in the labor-abundant country the price of the labor-intensive good would be bid down relative to the price of that good in the capital-abundant country. Once trade is allowed, profit-seeking firms will move their products to the markets that temporarily have the higher price.

Thus the capital-abundant country will export the capital-intensive good since the price will be temporarily higher in the other country. Likewise the labor-abundant country will export the labor-intensive good. Trade flows will rise until the price of both goods are equalized in the two markets. The H-O theorem demonstrates that differences in resource endowments as defined by national abundancies is one reason that international trade may occur.

MORE INFO The Stolper-Samuelson Theorem The Stolper-Samuelson theorem describes the relationship between changes in output, or goods, prices and changes in factor prices such as wages and rents within the context of the H-O model. The theorem was originally developed to illuminate the issue of how tariffs would affect the incomes of workers and capitalists (i.e., the distribution of income) within a country. However, the theorem is just as useful when applied to trade liberalization. The theorem states that if the price of the capital-intensive good rises (for whatever reason) then the price of capital, the factor used intensively in that industry, will rise, while the wage rate paid to labor will fall.

Thus, if the price of steel were to rise, and if steel were capital-intensive, then the rental rate on capital would rise while the wage rate would fall. Similarly, if the price of the labor-intensive good were to rise then the wage rate would rise while the rental rate would fall. MORE INFO The theorem was later generalized by Jones who constructed a magnification effect for prices in the context of the H-O model.

The magnification effect allows for analysis of any change in the prices of the both goods and provides information about the magnitude of the effects on the wages and rents. Most importantly, the magnification effect allows one to analyze the effects of price changes on real wages and real rents earned by workers and capital owners. This is instructive since real returns indicate the purchasing power of wages and rents after accounting for the price changes and thus are a better measure of well-being than simply the wage rate or rental rate alone. MORE INFO Since prices change in a country when trade liberalization occurs, the magnification effect can be applied to yield an interesting and important result.

A movement to free trade will cause the real return of a country’s relatively abundant factor to rise, while the real return of the country’s relatively scarce factor will fall. Thus if the US and France are two countries who move to free trade, and if the US is capital-abundant (while France is labor-abundant) then capital owners in the US will experience an increase in the purchasing power of their rental income (i.e., they will gain) while workers will experience a decline in the purchasing power of their wage income (i.

e., they will lose). Similarly, workers will gain in France, but capital owners will lose. What’s more the country’s abundant factor benefits, regardless in which industry it is employed. Thus, capital owners in the US would benefit from trade even if their capital is used in the declining import-competing sector.

Similarly, workers would lose in the US even if they are employed in the expanding export sector. The reasons for this result are somewhat complicated but the gist can be given fairly easily. When a country moves to free trade the price of its exported goods will rise while the price of its imported goods will fall. The higher prices in the export industry will inspire profit-seeking firms to expand production. At the same time, in the import-competing industry suffering from falling prices, will want to reduce production to cut their losses.

Thus, capital and labor will be laid-off in the import-competing sector but will be in demand in the expanding export sector. However, a problem arises in that the export sector is intensive in the country’s abundant factor, let’s say capital. This means that the export industry wants relatively more capital per worker than the ratio of factors that the import-competing industry is laying off. In the transition there will be an excess demand for capital, which will bid up its price, and an excess supply of labor, which will bid down its price. Hence, the capital owners in both industries experience an increase in their rents while the workers in both industries experiences a decline in their wages.

The Factor-Price Equalization Theorem The factor-price equalization theorem says that when the prices of the output goods are equalized between countries, as when countries move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries. This implies that free trade will equalize the wages of workers and the rentals earned on capital throughout the world. The theorem derives from the assumptions of the model, the most critical of which is the assumption that the two countries share the same production technology and that markets are perfectly competitive. In a perfectly competitive market factors are paid on the basis of the value of their marginal productivity which in turn depends upon the output prices of the goods. Thus, when prices differ between countries so will their marginal productivities and hence so will their wages and rents.

However, once goods prices are equalized, as they are in free trade, the value of marginal products are also equalized between countries and hence the countries must also share the same wage rates and rental rates. Factor-price equalization formed the basis for some arguments often heard in the debates leading up to the approval of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico. Opponents of NAFTA feared that free trade with Mexico would lower US wages to the level in Mexico. Factor-price equalization is consistent with this fear although a more likely outcome would be a reduction in US wages coupled with an increase in Mexican wages. Furthermore, we should note that the factor-price equalization is unlikely to apply perfectly in the real world.

The H-O model assumes that technology is the same between countries in order to focus on the effects of different factor endowments. If production technologies differ across countries, as we assumed in the Ricardian model, then factor prices would not equalize once goods prices equalize. As such a better interpretation of the factor-price equalization theorem applied to real world settings is that free trade should cause a tendency for factor prices to move together if some of the trade between countries is based on differences in factor endowments. MORE INFO The Rybczynski Theorem The Rybczynski theorem demonstrates the relationship between changes in national factor endowments and changes in the outputs of the final goods within the context of the H-O model. Briefly stated it says that an increase in a country’s endowment of a factor will cause an increase in output of the good which uses that factor intensively, and a decrease in the output of the other good. In other words if the US experiences an increase in capital equipment, then that would cause an increase in output of the capital-intensive good, steel, and a decrease in the output of the labor-intensive good, clothing.

The theorem is useful in addressing issues such as investment, population growth and hence labor force growth, immigration and emigration, all within the context of the H-O model. MORE INFO The theorem was also generalized by Jones who constructed a magnification effect for quantities in the context of the H-O model. The magnification effect allows for analysis of any change in both endowments and provides information about the magnitude of the effects on the outputs of the two goods. MORE INFO Aggregate Economic Efficiency The H-O model demonstrates that when countries move to free trade, they will experience an increase in aggregate efficiency. The change in prices will cause a shift in production of both goods in both countries. Each country will produce more of its export good and less of its import goods. Unlike the Ricardian model, however, neither country will necessarily specialize in production of its export good.

As a result of the production shifts though, productive efficiency in each country will improve. Also, due to the changes in prices, consumers, in the aggregate will experience an improvement in consumption efficiency. In other words, national welfare will rise for both countries when they move to free trade. MORE INFO However, this does not imply that everyone benefits. As was discussed above, the model clearly shows that some factor owners will experience an increase in their real incomes while others will experience a decrease in their factor incomes. Trade will generate winners and losers. The increase in national welfare essentially means that the sum of the gains to the winners will exceed the sum of the losses to the losers.

For this reason economists often apply the compensation principle. The compensation principle states that as long as the total benefits exceed the total losses in the movement to free trade, then it must be possible to redistribute income from the winners to the losers such that everyone has at least as much as they had before trade liberalization occurred. MORE INFO ——————————————————————————–1. The “standard” H-O model refers to the case of two countries, two goods and two factors of production. The H-O model has been extended to a many country, many goods and many factors case but most of the exposition in this text, and by economists in general, is in reference to the standard case. —————————————————————————————————————————————————————-1997-2004 Steven M.

Suranovic, ALL RIGHTS RESERVED Last Updated on 7/8/98


MARKETIN STRATEGY IN E-COMMERCE By: BRAD E-mail: emailprotected Marketing Strategy and E-Commerce Introduction With the rapidly advancing technologies that are occurring in modern business, organisations are required to be ready, and able to adapt within their ever-changing environment. It is true across all diverse industries that in order to stay competitive, organisations must be able to utilise the various tools that technology has to offer. Technological factors have been of growing importance, particularly in recent years. A major factor involved in these technology issues is the use of the Internet as a major issue to modern organisations. The Internet has been rapidly growing since it’s inception and is now commonly used in all sectors of societies, in all corners of the globe.

The Internet has quickly become one of the most valuable assets in modern technology, and as such, is developing as an integral part of modern commerce. As with past technologies, the Internet will have future technological advances develop from its own growth. The task the organisations of in the new century? Realise future opportunities and threats, and base a strategy accordingly. “Is it cliche to say that ‘the Internet changes everything’: the challenge now is to say what, how and how quickly”. (When Companies Connect, 1999, p.

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19) The Internet has lead to the birth and evolution of electronic commerce or E-commerce. E-commerce has now become a key component of many organisations in the daily running of their business. Simply defined, “electronic commerce is a system of online shopping and information retrieval accessed through networks of personal computers”.

(Reedy, J. Schullo, S. Zimmerman, K. 2000, pg.

29) E-commerce challenges traditional organisational practices, and opens ups a vast array of issues that the organisations must address. By focusing on the varying levels of an organisation, it soon become apparent the effects that E-commerce can have. An understanding of the implication E-commerce has on such organisational divisions can help businesses gain understanding hence plan for it’s inevitable continuing evolution. In terms of marketing, the modern organisation must be critically aware of the development of E-commerce, and the implications that it entails.

“Marketers develop their own recipe of promotional tactics to fit the product lines or industries in which they compete. Now electronic communications tools are and will continue to be an important ingredient in the promotional mix” (Reedy, J. Schullo, S.

Zimmerman, K. 2000, pg. 29) In assessing the implications of E-commerce in terms of marketing, it is important to understand its impact in respect to marketing strategy formulation. As the Internet, and in turn E-commerce has developed, and continues to evolve and grow, it is vital that any organisation, in any particular industry, must base it’s strategic planning around such a rapidly growing medium. The growth of the Internet is an environmental influence that must be embraced and understood so to successfully plan for future marketing implementation.

In order to successful realise the impact that E-commerce has in terms of marketing, it is important to break the area of interest into some key areas. As most of the issues that arise in terms of E-commerce represent organisations entering the environment, it seems natural to base discussion around this. Therefore, the bulk of the literature review relates existing organisations entering into the E-commerce market environment.

In successfully identifying the relationship between E-commerce and strategy, the issues are categorised as follows: 1. Strategic analysis Understanding the environment 2. Identifying the strategic options/SWOT analysis Strategic Advantages/Disadvantages Advertising Electronic cost cutting/publishing/Process 3. Corporate level, Business level, d Marketing level 4. Retailing in E-commerce Implementation Issues Financial Performance monitoring 5.

Conclusion Based on current knowledge state To gain a clearer understanding of the implication of E-Commerce in the formulation of marketing strategy, it is imperative to gain a clear understanding of the environment and it’s relevant effects. This helps in understanding the rationale in a developing marketing strategy, particularly the influences of E-Commerce on its make-up. The next crucial element is to gain an understanding of E-commerce itself, as well as the current and possible future developments. In understanding E-commerce’s impact on strategic foundations, an organisation’s strategies can be more clearly focused.

Once the organisation and E-commerce’s respective environments are clear it is then possible to understand E-commerce’s implications in regards to fundamental marketing strategies. By focusing on tools such as the competitive strategy framework we can gain a better understanding of strategy formulation. By now it is easy to link E-commerce ideals directly into the strategic planning sequence, and hence understand its impact to the marketer.

(Brown, 1997) By reviewing these traditional marketing theories and practices, it’s possible to see where, if at all E-commerce fit into current frameworks. This will provide relevant conclusions that can be made based on the strategic implications of E-commerce, and it’s attributes in the marketing process. In doing so, this adds a vital dimension to the marketer in an ever-growing technology based society, of which must be clearly understood. Strategic analysis Understanding the Environment In order to gain an understanding of E-commerce’s impact to the modern organisation it is imperative that the environmental issues are analysed and understood. The understanding of the environment in which an organisation is involved is a fundamental element of its strategic plan.

In order to be successful in any industry the organisation must have a sound understanding of influences that effect its product or service offer. When conducting an environmental analysis in regards to the Internet, it may seem that many of its attributes are present in traditional consumer markets. However, E-commerce provides organisations with a unique medium to analyse, requiring information relating specifically to it’s environment. (Strauss, J. Frost, R., 1999).

E-commerce ideals place particular emphasis on environmental factors, due to the high rate of change and development it constantly undergoes. An understanding of both environmental influence on the Internet and E-commerce, and that of a particular organisation is imperative basing any strategic formulation. Strauss, J. Frost, R. (1999) includes these macro and micro environmental factor as key issues, and they are extremely useful in constructing a basic for strategic planning. Macro Environment Technology Obviously technology is a key environmental issues that must be addressed when analysing and understand E-commerce. Technology is ever-changing, and as such E-commerce is absolutely influenced by it’s evolution.

Rapid changes in recent technological advances have bought about the Internet and in turn E-commerce, and such dramatic evolution is likely to continue. In terms of strategic formulation, technology is a huge issue that any organisation must be aware of when realising E-commerce’ s strategic implications. For example, an organisation thinking of developing a Web site must be strongly aware of technological issues that pertain to such initiations. The decision to develop a web-site internally or externally would be a key issue for any organisation. Internal web-site development would require a vast understanding of technology and require this environmental factor to be constantly reviewed and analysed. In any case, awareness of technology is vital in planning marketing and business strategies, and should be closely followed.

World economies Another key environmental influence is an awareness and understanding of global activity such as world economies. As the Internet provide a basis for global communication, the awareness of world economies must be understood in regards to E-commerce. The linking of the Internet world-wide, in turn effects the way in which E-commerce behaves, and therefore makes an understanding of world economies imperative. Legal/Political As with the need to understand world economies, global integration of E-commerce highlights fundamental environment issues such as legal and political influences. As independent countries operate different legal and politic systems, it is obvious that an understanding of such ideals is also important in addressing E-commerce. For example, a recent precedent-setting court case in New York recently, a judge ruled that New Yorkers were breaking the law by gambling on the Internet, even if the gambling companies were based in other countries. State Supreme Court Justice Charles Edward Ramos stated, “The act of entering the bet and transmitting the information from New York via the Internet is adequate to constitute gambling activity within New York State.” (Public Agenda Online, 2000) Such example highlights issues that organisation must be aware of when developing a marketing strategy formula.

Failing to recognise possible repercussions of E-commerce use, in a political or legal manner could prove catastrophic for an organisation. It is imperative it is carefully looked at, particularly in regards to E-commerce. Micro Environment Market environment The growth of E-commerce has transformed the way in which consumers purchase products as well as how organisations operate. The Internet provides the necessary tools; easy operation and exchange of information; and therefore effects all diverse industries and organisations. The Internet has become a useful tool for selling, buying and distributing goods and services globally in a rapidly growing supply chain. The potential market that the Internet provides has little or no restrictions by either geography or time, and therefore poses a huge impact on any organisation considering E-commerce in it’s strategic marketing formulation. Opportunities in E-commerce are enormous, as present growth and development have proved.

(Kay, E. 2000) The Internet provides a virtual marketplace, providing huge opportunities in the marketing strategies that an organisation my wish to develop. Forecasters have projected that the world wide E-commerce revenues will be over $350 Billion in the year 2000. (Jones, I. 1999) User trends The trends of Internet users and in fact the use of E-commerce in general is extremely valuable information that the organisation must be aware of. By knowing how the advances of the Internet are being used, a marketing strategy can be focused keeping these ideals in mind. As E-commerce provides different uses to varying companies or industries, user trends and their relative importance differ.

For example business to business electronic communication would represent different characteristic than communication relating directly to the end-consumer. Ideals such as customer tracking can be found as an integral advantage in the use of Internet based marketing. Information regarding “users” use of resources can be tracked reasonably easily on the Internet, and is a direct result of the information-based platform the Internet provides. For example provide e-mail announcements when a new product or service become available to its customers. (Reedy, J.

Schullo, S. Zimmerman, K. 2000). Such understanding and manipulation of user information is beneficial to both consumer and suppliers. (Fig 1.) is an example of user information that may be pertinent in designing a strategy based using research of Internet use.

The Graphics, Visualisation, and Usability (GVU) Centre conducted the research of this information that was found in on an information-based Web site. Such information may be particularly useful when implementing strategic formulation, however should not be treated as sacred. Because of the limited nature in which this research is presented, it is hard to gauge its validity as a neutral and independent source.

Organisation must be aware of such information’s credibility, and clear of its context and meaning. Without doing so, an organisation risks initiating a strategy that is based on inaccurate information. In keeping in mind the limitations of various consumer analysis information, it should be understood that there is still a place for its use in strategic formulation and planning. Having an awareness of the varying user trends aids in strategy formulation in a number of ways. By understanding how the users of information tools such as the Web act, for example, it is possible to forecast or predict future behaviour and base strategies accordingly. Therefore user trends are an integral environmental issues that FIG 1. INTERNET USER PROFILE must be identified, in order to achieve successful marketing success. Consumer analysis Possibly the major factor in understanding the effects of E-commerce towards marketing within an organisation is the awareness of who in fact has access to such resources.

By having an understanding of users of the Internet and E-commerce resources, the marketing strategy can be further advanced, and tailored in a favourable direction to the organisation. Various factors make-up the analysis of the consumer when addressing both E-commerce and the more tradition means of commerce. Ideals such as demographics and cultural influences must be identified when assessing the characteristic of any market. It is important that the users of Internet technology are identified, and the relevant consumer attributes understood. In terms of E-commerce, this aspect of the environment provides a basis for how an organisation would structure their marketing strategies based on the attributes that make up the general Internet consumer.

“It is important to get some idea of the degree to which the marketing approach will be accepted by potential customers” (Higgins, 1999, p.47) It is also imperative that awareness of the consumer does not limit organisations to just the end-consumer. Business-to-business relationships must also be taken into account when planning strategy based around the E-commerce framework. By being aware of how industries and organisations utilise tools such as the Internet, a marketing strategy can be further guided in the right direction. Identifying the Strategic Options/SWOT analysis Having provided a situation analysis and environmental analysis, an organisation must use the information, in order to implement its strategic plan. In implementing a strategic plan is it appropriate to identify the four key elements in an organisation’s environment. They are: the internal strengths and weaknesses; and the external opportunities and threats.

(Or SWOT analysis). By matching the organisations resources, and any apparent opportunities it may be possible to conclude an effective match, and hence, a favourable outcome. (Brown, L. 1997) These four major environmental factors are important for the organisation, and are vital in assessing its strategy in an E-commerce situation. For example a farming supplier whom currently possesses an e-mail ordering system may be thinking about developing a web-site. As they currently already operate basic E-commerce facilities, they may identify this as a strength in their business. Hence, in doing so, their strategic formulation has been based around the fundamental practice of SWOT analysis. These ideals keep with common literature and practice, however they can be further explored by looking at some of the external forces that E-commerce poses.

As such, E-commerce provides strategic advantages and disadvantages that have been widely discussed and challenge. As opportunities and threats can often be rather blurred, these E-commerce or Internet advantages or disadvantage pose some interesting question. Strategic Advantages/Disadvantages In having a comprehensive analysis of the environment in which the organisation is face with when dealing with E-commerce, the task is now rather simple. The organisation must identify how to use the Internet towards a useful business advantage. (McEarchern, T. O’Keefe, B., 1998) There are huge amount of interesting approaches to achieving such an ideal, and the basic ideals varying across different industries and organisations.

For example, “CD Now and are building businesses based on immediate availability and ordering of, respectively, any CD or book”. (McEarchern, T.

O’Keefe, B., 1998, p.62) While this may be an ideal medium for companies such as Amazon.

com it may prove rather less successful for different organisations. Unless clearly define objectives are set when approaching E-commerce, strategic ideals may prove derogatory to an organisation. (Higgins, J. 1999) While it is obvious that dynamic organisation possess varying attributes, there are some general advantages and disadvantages that E-commerce offers across all different industries. As E-commerce advances at it rapid rate, it is clear that no industry will be exempt from its impact. Therefore key issues in its possible uses must be address across all diverse industries.

Advertising Advertising on the Internet presents a significant opportunity for an organisation to enter the world of E-commerce. As part of strategic planning any organisation must be ready to develop it’s brand image and as such, the Internet offers a wide range of opportunities. Such as the use of billboards in the real world, the Internet can provide ideal locations to further developing their offer.

Obviously the information received on site hits and relevant user data acquired, helps to focus such ideals towards the appropriate target market. There are, however many views that Internet advertising will not gain distinctive popularity because of the difficulty in assessing it effectiveness (Ottman, 1996 cited Johns, R.,). While Strauss, J. Frost, R. (1999) believes that advertising on the Internet helps reach its revenue objectives, Johns, R. (1996) suggests that Internet advertising is full of clutter, and therefore proves difficult to gain the attention of the target market.

Virtual stores are another significant ideal in which strategic planning can base significant interest in, when addressing E-commerce. Virtual store can provide an inexpensive form of direct sales or help to supplement existing sales channels. (Strauss, J. Frost, R., 1997) By using the Internet, manufacturers are possible to reach the end-consumer without going through intermediaries. (Turban, E.

et al, 2000). Successful exponents of such strategies are organisations such as, and their success in the distribution of books. When aligning a strategic plan based around the development of a virtual store, there are some key issues that must be addressed. As with any strategic development, there are usually threats, and virtual stores pose considerable threats due to intense competition.

In a marketplace such as the Internet, other company can apply huge pressure, perhaps due to a sustainable competitive advantage. (Strauss, J. Frost, R., 1997) Electronic Cost-cutting By replacing existing print and publishing cost, organisation can use E-commerce for their electronic publishing. Distribution on the Web, as opposed to mail, for example can have a huge impact on cost, and may be a strategic driver. The initial strategy might be for lowered cost of the product offer, and hence lowering cost in documentation distribution may help in the financial control of such a strategy.

FIG 2. THE STRATEGY HIERARCHY (Brown, L. 1997, p.10) The Strategy Hierarchy As a vital aspect of understanding the implications of E-commerce to marketing strategy, it’s vital to look at all levels of the strategic hierarchy. The strategy hierarchy (Fig 2.) identifies the: corporate strategy business strategy And at a functional level, the marketing strategy. It is imperative that when addressing the strategic implication of E-commerce, that all three areas of the organisation must be addressed.

In doing so, the marketing role within the organisation is not isolated, and is in keeping with the overall organisations core objectives. The first step is to address the corporate strategy and define the its link to the strategic development of E-commerce. The basis for the corporate strategy identifies where the business wants to focus its attention in regards to the scope of the organisation. In doing so bases it’s mission and vision to align with key objectives. (Brown, L.

1997) Paxton, B. Baker, T. (1997) suggests that “it is essential that the Internet planning process is not divorced from the corporate strategic management process but is integrated into each stage of your company’s existing process”. The focus of the corporate strategy is to develop synergy between the various Strategic Business Units (SBUs). This is a vital element to any organisation that is evolving its strategies into new domains, particularly as a result of environment shifts.

Therefore when formulated a strategy based around the use of E-commerce, it is imperative that the SBU planning is in synergy with the core corporate objectives. In doing so, the other relevant SBUs will follow the corporate strategies lead. As the varying SBUs are aligned within the corporate strategy, they too have influence over their relative functional levels. The business strategy possesses more defined objectives as well as a clearly defined competitive strategy. Because the SBUs operate in their relevant markets, such clearer focused goals are possible.

“At this level the focus is on building, defending and maintaining competitive positions through the development and implementation of competitive marketing strategies”. (Brown, L. 1997, p.

11) The role of the SBU strategy is clear, and is also highly relevant to E-commerce issues. This drive to maintain competitiveness in a SBU’s market may be the foundation for a move into E-commerce development. As the core goals are to sustain a competitive position, an organisation may decide that E-commerce provide this and inherits it’s use in their strategic planning. However, some organisations may find that E-commerce provide them with no significant competitive offering, and hence chooses to ignore it as part of their strategic formulation. The decisions must “follow a well prepared business plan and require a thorough understanding of the impact of the bottom line”. (Higgins, J.

1999, p.48) The marketing strategy level of strategic planning identifies some key functional issues that the organisation must implement. This identifies the relevant marketing objectives that the organisation wishes to implement as well as the product market strategies. This level gains a clearer focus on the consumer in each particular target market. This integrates many key marketing ideals, and is used to co-ordinate marketing resource and the marketing mix to reach the desired markets in which are targeted. The Marketing strategy is by far the most relevant in measuring the impact of E-commerce on the marketing strategy formula.

While the upper levels in the hierarchy shapes the direction in which various marketing strategies are planned; it is this level that develops the functional elements of this strategy. Retailing in E-commerce A major shift in the evolution of E-commerce is it’s impact on the traditional retailing system, in particular the shift of intermediaries from the distribution channel. In theory, the Internet allows manufacturers to sell directly to the consumer, cutting out the traditional ideals of a middleman or intermediary.

(Turban, E. et al. 2000).

Turban (et al. 2000) describes this phenomenon as disintermediation. Turban, E. et al. (2000) also identifies an emerging “electronic middlemen” such as e-mail and product selection agents. This is quite naturally classified as reintermediation.

(Fig 3.) Shows the prevalence of the two as a result of E-commerce developments. The evolution of the second phenomenon is commonly believe to the basis for future E-commerce practices. Hutchinson, A. (1997) suggests that this middleman effect with combine with global integration and widespread network connections. Once again Amazon.

com provides are useful example of a strong electronic intermediary. When devising a marketing strategy an organisation must be aware of this shift in E-commerce structures. The awareness of how intermediaries in the distribution channel is absolutely vital to marketing strategy, and the implications of how this is changing could have a profound effect on marketing strategy formulation. FIG 3. DISINTERMEDIATION AND REINTERMEDIATION BY EC (Turban, E. et al. 2000, p.64) Implementation Issues Financial The development of Web site is fundamentally used to result in some level of revenue or a decrease in the cost.

Revenue is typically based around increase sales, and decrease cost could arise due to elimination of intermediary forces. (Strauss, J. Frost, R.

1999) Therefore the basis for integration into E-commerce has an effect on financial issues, and may perhaps be the basis for the strategic formulation. As with almost any strategic plan, there are associated costs that derive, and this is reflected also in E-commerce. Such cost could be identified as follows: Connecting to the Internet (The Internet Service Provider) Hardware and software Web site and advertising designers Staff to maintain the Web sites and manage e-mail with stakeholders.

Performance monitoring As with any strategic formulation, E-commerce requires appropriate performance monitoring to ensure that is place in the organisation continues to be in sync with the functional goal and objectives put in place. This includes ensuring that any adaptation to E-commerce is monitored, including staff training and awareness. The use of E-commerce in an organisation must be carefully monitored to ensure that it remains productive, and that they generate some sort of gain. As well as these functional aspects, it is imperative that the actual strategies that are formulated as constantly review, and future developments are adapted into such strategies. Conclusion E-commerce is revolutionising the way in which an organisation thinks, and in particular how an organisation bases it’s future goals and objective. An understanding of the critical make up of organisations, and how they develop their strategies, helps to close the gap between E-commerce and strategic marketing. An organisations strategic planning process helps to cover the vital issues that any new paradigm may invoke. This structure helps provide a basis for assessing the impact of E-commerce and it’s relationship with marketing strategy.

By understanding the organisation as a whole, it becomes clear what initiates strategic development, and hence provides clear reasons why E-commerce may become prevalent in strategy formulation. Such an understand allows the organisation to develop E-commerce strategy that is in sync with the organisations corporate strategies. Such fundamental comparisons help to gauge the effect E-commerce has and will have on modern organisations. If Organisations gain an understanding of E-commerce and its relationship to marketing and operational strategies, they will be better ready for future development and technological change. (Baty, E. 2000) In order to be competitive in modern business it is imperative that the organisation’s corporate strategies are constantly review, and environmental influences addressed.

One of the major shifts in recent years is the technological shift towards the Internet, and as a result E-commerce. E-commerce has developed into an enormous aspect of the Internet and as such, organisations have been required to address this in their strategic planning. For example, the University of Otago’s strategic plans would be to look forward to technological changes, and be ready to adapt to these.

As such, perhaps the introduction of an E-commerce Degree may be a resultant of their strategic plans. Organisations that are looking towards E-commerce as a strategic option are met with numerous issues that must be addressed. Analysing theories and thoughts on E-Commerce helps to gain a better understanding of how an organisation would approach such a strategy. As with any strategy, many attributes must be considered, and carefully evaluated. As a fundamental component of strategic planning is to envision future development, perhaps these ideals could be advanced further. While E-commerce does and will have a profound effect on marketing strategy formulation, what will the future of E-commerce hold? As organisations implement their strategic plans in respect to E-Commerce, it must be realised how this will effect other part of the organisations. It is also important to understand how society is impacted as a result of their strategic plan. Is promoting a greater number of Internet users irresponsible? Perhaps promoting regular use of computers is affecting the general health of the consumer.

While such suggestion seen rather extreme, it is feasible to assume that such ideals warrant further investigation. In keeping with these future ideals, research may be sought on developments in technology and the potential for total media packages and what they would mean to the advertiser. Perhaps the next step in the Internet, is total home entertainment, and identification of this early, could lead to a sustainable competitive advantage in E-commerce. Such forward thinking epitomises the fundamentals of formulating a successful


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