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Table of Cont
SIMULATION OF A B2C E-COMMERCE MODEL OF
DURABLE CONSUMPTION GOODS
Catalina Ochoa
Jorge E. Uribe
Manuela Velasquez
Escuela de Ingenieria de Antioquia (EIA)
Carrera 43C # 1 A sur 182. Apto 802 Medellin — Colombia
(574) 266 0510
fochoa@geo.net.co
franquicias2@epm.net.co
furilbe@epm.net.co
catyochoa@hotmail.com
1. ABSTRACT SUMMARIZING THE ENTIRE PAPER
The work managed to develop an administrative tool that has the purpose of
facilitating the strategic decision-making knowing the results towards the
future of the actions, without having to invest money, time, resources and
personnel. Additionally the risk of making erroneous decisions is diminished
and it qualifies the managers. It gives fast and easy answer to the day to day
questions of “What happens if...2” making it possible to play with the
company.
The model developed “simulation of a B2C e-commerce model of durable
consumption goods” based on real data obtained from Amazon.com, Buy.com
and Egghead, allows taking different decisions: price, site launching (budget
and time period), marketing expenses and selling of banner advertising. The
different decisions enable the trial and error development of a profitable
dynamic strategy. As you play with the model you may experiment different
scenarios and use variable sensibility.
2. KEY WORDS
B2C, simulation, profit, strategy, decision-making, I-think, e-commerce,
scenarios.
3. EXTENDED ABSTRACT
Recently, e-commerce presents great development and growth; these can be
seen clearly with the number of companies of this type all over the world,
especially in the USA. Any way, these companies’ present low cash return for
investors, generating in most cases great losses.
Basically this study pretends to develop a profitable strategy for the e-
commerce B2C companies who sell durable consumption goods (kind of goods
sold the most online) by developing a continuous and dynamic simulation
model. The simulation model lets reenact global functions of the company
basing on its operating areas.
The model developed in this study shows how the strategies used in the three
biggest e-tailing companies in the USA: Amazon, Buy.com and EggHead where
not the best and didn’t show a promising future. The model also lets you
analyze the sensibility of each variable to see its effect in the others variables
of the model. With the results obtained a strategy is proposed, which is not
the only one, but it is a strategy that assures the companies’ well being over
time by generating high cash flow and operating profits.
In the complex enterprise world that we live today, the use of simulation
tools like "I-think" generates competitive advantages and better strategies.
The model of e-commerce companies allows simulating transcendental
decisions such as the determination of price and investment in marketing, and
then analyzing the results in graphical or numerical form. The simulation is
without a doubt a learning tool, of trial and error, that generates experience
instantly and at very low cost.
This project must be concluded from two approaches, given that the
simulation model was developed both as a tool that allows any company to
improve their strategic decision making; as well as it enables the analysis of
the results of e-commerce companies from the point of view of the users of
the tool (managers, administrators, owners, etc.)
TOOL CONCLUSIONS
The work managed to develop an administrative tool that has the purpose of
facilitating the strategic decision-making knowing the results towards the
future of the actions, without having to invest money, time, resources and
personnel. Additionally the risk of making erroneous decisions is diminished
and it qualifies the managers. It gives fast and easy answer to the day to day
questions of “What happens if...2” making it possible to play with the
company.
The tool emphasizes the integrality and integrity of the multiple perspectives
in the model. Every area of the model, logistics, marketing, order processing,
other income and financial, interact with each other forming a system where
every cause has its effects. The processes of all the areas are reflected in
changes in the financial area and for easy interpretation and handling they
are expressed in money. Simultaneously the model counts with integrity
within its areas because each one contains everything that ordinarily
constitutes it. With these two characteristics the users of the model can
visualize the company globally and understand the effect of their area in the
financial results.
When understanding a company the model allows the handling of business
dynamics, the adaptation to the market and enables the use of information
for strategic decision-making. The model is an administrative instrument
based on dynamic relations. Relations that update each differential of time
giving a new result every instant and assuming the changes that take place in
every company by the single fact of existing in the present world.
The model agrees with the last dominant management tendencies, because its
operation incorporates them. Planning by sceneries: the model is useful to
analyze different sceneries and helps to make the best decisions in every
scenery since the future results are known previously. Management based on
value: the model allows analyzing the added value that each variable
generates because it makes possible the sensitization of each one with
respect to indicators like the ROI, Discounted Cash Flow and EVA. It
represents the seeing from the graphical or analytical point of view the way in
which the processes that generate value are materialized. Balance Score
Card: the model displays a strategic map that materializes the vision, mission
and the strategy from the operation, defining indicators. In other words the
model shows how to make day-to-day activities endorse what is formulated or
that the operation endorses the planning. All of the above, in an integrated
form, makes it possible to use the model like a tool that adjusts clearly to the
tendency of managing from the clarity and against complexity.
RESULTS CONCLUSIONS
The results demonstrate that it is possible to break the existing paradigm
where it is thought that e-commerce companies are always going to generate
losses; it breaks the belief that by themselves they cannot exist. On the
contrary, it was verified according to the model, that these companies could
generate cash towards the future if they change their strategies. The high
sensitivity of the cash flow based on different decisions, shows the
vulnerability of these companies when making wrong ones and points out the
importance of using the simulation to try to understand better the reality of
the industry.
Of the different strategies that were simulated, we found enlightening
situations with respect to the decisions in conflict and the model managed to
simulate the American market with some proximity. Nevertheless, it must be
recognized that the model, like any model, tries to simplify the reality in
order to be able to simulate it and, therefore, has certain limitations starting
off by the assumptions.
The strategy of a strong campaign of launching must be taken into
consideration now that, these companies, as they are in Internet and not ina
commercial passage, must make themselves known aggressively.
Nevertheless, once reached the optimal level of clients, marketing should be
reduced just to maintain the clientele and turn them profitable. This
conclusion is partial since maintaining clients on the Internet it’s extremely
complicated, in fact the Internet is reined by the anonymity and clients are
lost easily upon new offers from competitors.
The price offered by e-commerce companies does not have to be far below
the one of the traditional commerce as it is thought; these companies require
a margin sufficient to maintain its operation although they have different
models of business. It is clear that the type of business does not allow working
with very low margins.
Generating high sales growth in the Internet is very expensive since they are
obtained mainly with greater marketing or acquisitions, nevertheless, it is
shown that the costs (general, administrative, content and development)
increase with the same rate as the sales and therefore there are no
economies of scale generated in the operation. From this point of view,
growing indefinitely only leads into more losses; in addition, to be innovative
in a world where copying is quickly does not generate sustainable barriers in
the short term. Everything added to the difficulty to patent advances in the e-
commerce sites. Considering all these restrictions, when having only variable
costs, all unitary sales must generate cash and be profitable.
The investment capitals are limited and have reached their end after the
apogee of Internet; definitively the e-commerce companies must generate
cash towards the future and obtain the so yearned profit. They cannot depend
on risk investors or on the stock market since they are both demanding fast
results.
It is difficult to find an additional value offered by the e-commerce in the
durable consumer goods, it is possible that greater convenience exists when
buying them in the network but at the same time this is done without really
knowing the products. The previous situation is not due to resist with low
prices, on the contrary, the sites must be specialized in offering products that
are scarce, in order to offer what the clients are looking for, so that they are
willing to pay more to obtain them. Finally, the sites of Internet must take
advantage of the income by banners, and how this contributes to their
margins. The model shows that the benefits are higher than the damages
caused by selling banners. What is clear is that the strategy cannot be
centered solely in the advertising income, since the e-commerce enterprises
are commerce companies not media companies.
The previous conclusions are sustained by the results of the model, and
although they are sustained mathematically, they must be reviewed with
thoroughness at the time of applying them to each business. We cannot deny
that all models have great limitations when predicting the real world.
Limitations like the behavior of consumers, the reaction of the market, the
actions of the competition and the accelerated advance of the technology
because they make some apparent truths loose validity with time.
Anyway, the model is one of the first approaches to the present situation of e-
commerce companies. Today it is structured for the United States market, but
it invites people that are interested to make improvements, add significant
variables to each particular business, apply it to the Colombian market or
other markets by just by changing the statistics, and especially to enjoy and
take benefit from it.
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