Essay: Dutch Life Science department of Hays

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  • Dutch Life Science department of Hays
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1.1 Problem indication

“The right job can transform a person’s life, the right person can transform a business”(Hays, 2015: 1). Within the recruitment sector this sentence is key, but within Hays it is the driver of their daily business. The overall process of attracting, selecting, and appointing suitable candidates for jobs within an client organization, either permanent or temporary, can be referred to as recruitment (Srinivas, unknown ). In the current global work environment hiring new employees not only entails high costs but also increases the risk of the newcomer not being the right person for that particular position.

Mr. van de Werfhorst, management consultant, mentioned in an interview with ‘De Financiele Telegraag’ (27-6-2015) a calculation of the cost that the Dutch businesses waste annually by hiring the wrong person for a role. Approximately 17% of newly hired employees are leafing within one year. The time spend on the hiring process, the cost of advertisement, some guidance when the employee expresses his doubts, all together these cost can reach an amount of €3500 – € 18.000. After this first mismatch, the whole process can begin from the bottom up. In a research on behalf of Robert Half (2015), a recruitment agency in the field of financial and administrative professionals, 200 HR-managers where asked what the effect of hiring the wrong employee were on the company itself. The major of the HR-managers indicate that the productivity of the company drops significant, the financial cost are quite high, as mentioned before, and besides these two consequences, the wrong person within a team can cause tensions. With all these consequences of hiring the wrong employee for a role, van der Werfhorst (De Financiele Telegraaf 27-6-2015) suggests that companies should look more at the soft-skills from employees and their potential instead of only the hard-skills and requirements.

A dominant feature nowadays is the speed and accuracy by which business has to be done (Recruitment goes virtual, 2013). As a leading global expert in qualified, professional, and skilled recruitment and employment Hays is trying to meet these values too. As a specialist recruiter Hays has built up a global business within 33 countries, with over 20 expert labels.

Recently, new avenues for creating wealth are developing. Established firms are creating new businesses over the Internet, referred to as ‘e-business’, with its dynamic, rapidly growing and highly competitive characteristics (Amit & Zott, 2001). New ventures are exploiting the opportunities the Internet provides, which makes the environment more competitive. While large firms have the resources to facilitate innovation, on one hand, on the other hand, these firms may embed structural inertia, because of the complicated business processes, organizational structure, and hierarchical decision making. (Rogers 1995, Damanpour 1996; Zhu et al. 2004, p. 42)

Companies are more knowledgeable about what works and what does not, because of the knowledge which is available, but meanwhile, technological innovations are creating new opportunities. The right tools are needed to improve companies’ effectiveness when making strategic moves, allocating scarce resources, and managing risk. But value creation in e-business goes beyond the value that can be realised through the configuration of the value chain (Porter, 1985), the formation of strategic networks among firms (Dyer and Singh, 1998), or the exploitation of firm specific core competencies (Barney, 1991). More traditional firms are less capable of novel exchange mechanisms and transaction structures, than e-business firms.

Large companies begin to see new, Web-enabled firms taking away small pieces of the markets. The e-business threat encourages them to rethink more efficient digital strategies that improve customer service, integrate the value chain, and accelerate information flows, to make the threat of e-business an opportunity for the firm. Pursuing new e-business strategy is complex as the focus shifts from physical to digital assets. Although an e-business strategy is complex, it represents the next generation of corporate strategic planning (Kalakota & Robinson, 2000).

According to a survey mentioned in Srinivas’ study (unknown), 67% of the HR professionals felt that the use of social media and networking will be the primary recruitment tool by 2015. This social recruiting is described as the process of sourcing or hiring candidates through the use of social platforms as promotional channels by employers. This kind of recruitment is rising, but is it suitable for all types of jobs? (Srinivas, unknown)

The term ‘platform’ characterize products, services, firms or institutions that mediate transactions between two or more groups of agents (Rochet and Tirole, 2003). The two groups are attracted to each other, a phenomenon that economists call ‘the network effect’.

With two-sided network effects, the value of the platform to any user largely depends on the number of users on the network’s other side. Value grows as the platform matches demand from both sides (Eisenmann et all., 2006).

Using these ‘social platforms’ in an efficient and effective way is from the view point of the employer, of great use to communicate their value proposition as an employer, and make use of the provided opportunities.

The importance of these development forced Hays Recruitment to go along with the trends. As a professional recruitment agency, in a dynamic, rapidly growing and highly competitive environment, Hays has to make smart use of her position as a platform. As a mediator between the client and the potential employee, Hays offers her service as a recruiter to make the transaction between the two groups of agents as smooth as possible. The value Hays creates with her service as a mediator, has to be of high quality to ensure future comeback of her clients. Besides the value Hays creates with her service, Hays as a platform has the task to ensure the demand on both sides of the two-sided platform are matched.

In the Dutch Life Science department the question rises if the way of operating which is now used, is the most efficient and effective. Compared to other Life science divisions of Hays globally, the Dutch division lags behind. Globally Hays works with the same business model, the reason why this approach did not work as well in the Netherlands, as globally is unclear.

1.1.1 Research question

Understanding the way of how the Dutch Life Science department of Hays is operating in a highly competitive business environment is key to grow this department successfully. The influences and opportunities of the Internet, as presumed under the label ‘e-business’, is therefore of great influence on how this specialist recruiter has to do its business to generate the greatest amount of value. But also the network effect of the two-sided platform, where Hays is seen as the mediator, is of importance to oversee the whole business of the recruitment professional.

In this report a study is performed which attempts to find out how the Dutch Life Science department is operating, and which elements should be modified to realise future growth. In doing so, the study focuses on answering the following, overarching, research question:

“What is the value proposition design of service brokering platforms and what elements are central, or can be used and implemented, by Hays to realise a future growth for the Dutch Life Science department?”

1.1.2 Scope

The focus of this report will be to explore how the Dutch Hays Life Science department can grow significant within the dynamics of doing business over the Internet.

Hays create
s her value as a mediator between clients and potential employees, and finds potential candidates by making use of several Internet based sources, besides the existing networks of Hays’ employees. This is the reason why Hays can be seen, and in this report will be seen as a ‘service brokering platform’. Given this, the goal of this report is to find out which elements are central in creating value for both sides of the two-sided platform, clients and, candidates, and how these elements can be used or modified, so that a future growth is possible.

Central elements in this report, therefore are; Osterwalder’s (2015) “Value Proposition Design”; Virtual Markets; and, service brokering platforms.

1.1.3 Structure of the report

To answer the overall research question in this report, a few sub questions are made up to. With these sub questions each part of the research question is covered. The questions are primarily used in the second part of the report, which is the literature section, they form a solid base for the empirical section. In the empirical section all of the sub questions come together in the real-life case of the Dutch Life Science department of Hays.

The first section of the report is the introduction. In this part an introduction is given of what the reason of this report is, but also a short description is given about Hays as a company, and especially of the Dutch Life Science department. The first sub question in this section will therefore be:

1. Which elements are key in the operating process of the Hays Life Science department, and how are they realising current growth?

In the second part, a theoretical background is developed. With this background the empirical section can be better understand. A few theoretical subjects will be discussed, like Osterwalder’s (2015) book “Value Proposition Design” as a starting point and key reference item. The reason for using the elements described by Osterwalder (2015) is that the approach used in the book can provide opportunities for businesses to explore

In doing so, businesses should see the customer as number one, and everything around the customer as having potential to be modified to research customers wants (Osterwalder, 2015). With this approach as the basis of the report, an analysis can be made of how the operations currently go and how they can be modified to gain a significant growth. The main sub question of this part will be:

2. What is a Value Proposition and what is the practical use of it?

Following the explanation and analysis of Osterwalder’s Value Proposition Design (2015) and applying it to the Dutch Life Science department of Hays, the second literature part focus will be on virtual markets and especially two-sided platforms. Virtual markets refer to settings in which business transactions are conducted via open networks bases on the fixed and wireless Internet infrastructure (Amit & Zott, 2001). With two-sided network effects, the value of the platform to any user largely depends on the number of users on the network’s other side. Value grows as the platform matches demand from both sides (Eisenmann et all., 2006).

3. What are Virtual Markets and how are they differs from traditional markets?

The choice for this literary theme is based on the daily operations of Hays Life Science, which is mostly performed online. Thereby, the market platform approach is a valuable complement to this report because of the novelty of this phenomenon in the business field. The market platform provides the device for connecting supply and demand and establishes and exploits market power (Rochet & Tirole, 2006). The way of how Hays is doing business can be seen as a market platform, therefore this is an interesting complement of this report. The sub question in this part is:

4. What are the main characteristics of service brokering platforms?

After these concepts are discussed separately, the forth section in the literature part will connect the concepts with each other. The sub question therefore is:

5. How can a Value Proposition be made of a service brokering Platform?

After the literature review about the previous discussed subjects, the third part of the report will apply the literature on the Dutch Life Science department of Hays. Recommendations are made about how this department can modify its way of operating to facilitate the significant grow, where they are looking for. In this part the sub question is:

6. What is the leverage effect when the Value Proposition Design is connected with the concept service brokering platforms of Hays Life Science to peruse future growth of a company.

The overall structure of the report is visualized in table 1.

Tabel 1: Report structure

1.2 Hays

As a leading global expert in qualified, professional and skilled recruitment, Hays is leader in the professional recruitment world. Every day the consultants’ of Hays help candidates find their next role, and they also help clients reshape workforces and deal with talent shortages.

1.2.1 International Business Model

Hays is operating globally, in 33 countries they are represented, grouped into three regions: Asian Pacific; Continental Europe & Rest Of World; and the UK & Ireland. Within these operating regions Hays distinguishes 20 specialisms, which can be found in table BLABLA. Within these specialisms Hays focuses on the segment of professional, ‘white collar’ skilled or specialist recruitment. The salary of the candidates Hays place range from €50.000 annually to €150.000. The fees, which Hays receives from the client, are calculated as a percentage of the salary of the candidate placed.

Hays beliefs that the key to driving superior and resilient financial performance, and better results for their clients, through the economic cycle, is having a balanced exposure within and between markets. In table 2 form the Hays Annual report (2015, p. 7) the breadth of Hays’ expertise is presented.

Tabel21 Breadth of expertise (Hays Annual Report, 2015)

As shown, most of Hays’ business is done in the private sector, and slightly more temporary contracts are filled in than permanent contracts. In 2015 Hays received 10 million CVs and placed 63.000 people into permanent roles and 200.000 people into temporary assignments. On the far right some specialism are shown, the remaining specialisms are too small to shown in this table.

As stated in the annual report of Hays (2015), “We have world-class expertise, Building world-class businesses. We are Hays” With this statement in mind the question rises of how Hays is operating to achieve the highest quality they claim to have, and to perform future growth.

Hays’ business model describes three pillars on which they rely when delivering world-class results for clients and candidates. These three pillars are; People, Technology and, Brand. The first pillar, People stands for the ultimate people business which Hays is. Their success relies on hiring, retaining, and training the best expert recruitment consultants and management in the industry. The second, Technology, is the result of today’s data-rich world. The philosophy where employees of Hays are equipped with the latest technology tools and products is the heart of their business. The fact that clients and candidates interact in multiple evolving ways using different channels, have to be recognised and responded to, as is providing the technology solutions demanded by clients. The third, and last pillar is Brand. As a leader in the specialist recruitment market, Hays’ reputation is key, and enhancing it by supplementing products such as ‘The Hays Journal’, ‘Hays Global Skills Index’, enh
ances the perceptions of Hays as leader in the word of work.

1.2.2 Operating: team/kpi’s/fill rate

There are two ways Hays works, from the vacancy, and from the candidate. When Hays has a vacancy to work on, they will find the best candidates suitable. But when Hays mediates a candidate, it is also possible to search for vacancies for the specific candidate.

1.2.2.1 Indicators

To get the best results, and in the end a placement on a vacancy, Hays beliefs in working with several indicators. These indicators are used as a directive and to become aware of how much input an employee has to perform to get successful results. There are five indicators used to get the result of a Net Fee, these indicators are stated in table 1.

Indicator Meaning

KPI Key Performance Indicators

HPI Hays Promotor Index

D&CS Digital & Creative Services

Data Quality Data Quality in the Hays database

Tone of Voice

Stukje KPI’s

HPI

1.2.3 Sources to recruit

Hays uses various tools with which they can find and approach the best candidates. Employees of Hays have access to the Hays database, in which thousands of candidates their CV are uploaded. In 2015 approximately 10 million CV were received and uploaded in the database of Hays (HAYS PLC ANNUAL REPORT & FINANCIAL STATEMENTS 2015, p. 2). The first source in the recruitment process is to look in the database, because this is the fastest way to find the suitable candidate for a job. Each candidate in the database is spoken with, so a lot of information about a candidate is available.

Other tools used in the recruitment process are listed and explained in table 1.

Tool Meaning

Target email Doelgerichte email verzonden naar max. 500 kandidaten in de Monsterboard database

Offline media Print advertentie in de nationale, regionale of specialistische bladen tegen aantrekkelijke voorwaarden

E-shot & postkaart Email en postkaart doelgericht verzonden naar potentiele kandidaten in de database van Hays

Video Een bedrijfsvideo ontwikkeld via Hays om zo een uniek inzicht in uw bedrijf te geven aan potentiele kandidaten

Microsite Mini website om de werkgever te profileren als aantrekkelijke werkgever, geheel beheerd en ontwikkeld door Hays

Google Gebruikmakend van Google om de vacature te promoten onder de latent en actief werkzoekende op het web

Social media De vacature als posting op Linkedin via het netwerk van Hays en tevens via RSS feed rechtstreeks op Twitter

Hays mediapakket De vacature gepost op diverse websites, waaronder generieke en specialistische websites

1.3 Life Science

As discussed earlier, this report focusses on Hays’ Dutch Life Science department. To better understand what kind of department this is, this paragraph will outline the most important subjects within this department. The Life Science label of Hays is one of the biggest labels globally (bron). In the Netherlands this label exists since … years.

Because the Life Science label in the Netherlands does not have the same returns as in the rest of the world, it is quite interesting to first take a look at how the Life Science department is operating globally and afterwards take a look at the Dutch approach.

1.3.1 Global

Stuk in overleg met Patrice Chevrotin – Sales director LS France

1.3.2 Netherlands

2. Literature

To provide an understanding of the key concepts used in this report, this section will take a look at the various literary subjects. As mentioned before, Osterwalder’s (2015) book “Value Proposition Design” will be used as the main theory in this report. The use of this theory is because of the customer approach that is descried in the book. The customer is seen as the number one in a company, and everything around the customer as having potential to be modified to research customer wants (Osterwalder, 2015).

The second theoretical subject used is about Virtual Markets. Virtual markets refer to settings in which business transactions are conducted via open networks bases on the fixed and wireless Internet infrastructure (Amit & Zott, 2001). This theoretical subject will help to build understanding of the Hays seen as a platform.

2.1 Value Proposition Design

The subtitle of Osterwalder’s (2015) book “Value Proposition Design” describes it already well, “how to create products and services customers want”. Osterwalder mentioned the value of knowing what your customers really want and the effects of putting the value proposition design and business model together to create a shared language of value creation. Continuously invent and improve value propositions that meet customer profiles will be of added value of a company when used well. “To sustainably create value for your customer, you need to create value for your business. To create value for your business, you need to create value for your customer” (Osterwalder, 2015, p 144).

2.1.1 The Value Proposition Canvas

The Value Proposition Canvas has two sides, the Customer Profile and the Value Map. With the Customer Profile the customer understanding will be clarify. With the Value Map an intention will be described of how to create value for that customer. When the Customer Profile and the Value Map meet each other well, a Fit is achieved. When the company’s products and services produce pain relievers and gain creators that march one or more of the jobs, pains, and gains that are important to your customer. It is important to acknowledge that products and services do not create value alone. Only in relationship to a specific customer segment and their jobs, pains, and gains, the products and services will create value.

The definition of value proposition used by Osterwalder (2015) is; the benefits customers can expect from the companies’ products and services.

2.1.1.1 Value Map

The Value Map describes the features of a specific value proposition in the business model in a structured and detailed way. The Value Map contains three parts, these are products and services, pain relievers, and gain creators. The products and services complement list all the products and services a value proposition is built around. The pain relievers describe how the described products and services alleviate customer pains. The last complement, gain creators describe how the products and services create customer gains.

2.1.1.2 Customer Profile

The Customer Profile describes a specific customer segment in the company’s business model in a more structured and detailed way. It breaks the customer segment down into its jobs, pains, and gains. The customer jobs describe what customers are trying to get done in their work and lives, expressed in their own words. Pains are the bad outcomes, risks, and obstacles related to customer jobs. And the last complement of the customer profile are the gains, which describe the outcomes customers want to achieve or the concrete benefits they are seeking.

All of the described complements of both the Value Map and the Customer Profile, can be ranked in importance, severity, and relevance. The use of customer ranking jobs, pains, and gains is essential to design value propositions that customers really care about. When the customer is well understood and the company knows what matter to the customer, then the value proposition can be improved or new ones could be invented.

2.1.1.3 Fit

Fit is achieved when the Value Map matches the Customer Profile. Striving for fit is essential in the Value Proposition Design. Customers expect and desire a lot from products and services
and at the same time, have a lot of pains. It is the company’s job to focus on those gains and pains that matter most to customers and make a difference, to get fit. In a successful value proposition, fit between what a company offers and what customers want is required.

There are three stages of fit Osterwalder (2015) describes, Problem-Solution Fit, Product-Market Fit, and Business Model Fit. The first fit, Problem-Solution Fit, occurs when relevant customer jobs, pains, and gains are identified and the company believes it can address them with their value proposition. The fit is not yet proven and exist mainly on paper. The second stages is the Product-Market Fit. Within this stage, customers positively react to the company’s value proposition and it gets traction in the market. In this phase, there is evidence of what does and what does not create customer value. The iterative process will eventually lead to the last phase, the Business Model Fit. Within this phase the business model is find that is profitable and scalable. When more revenues can be generated with the value proposition than the incur of costs to create and deliver it, the business model has a fit.

2.1.2 Multiple Fits

Osterwalder (2015) also describes the situation in which several value propositions and customer segments work for the business model. Then the company require fit between each value proposition and its customer segment for the business model to work. One discussed illustration of multiple fits is the platform business model.

A platform only function when two or more actors interact and create value within the same interdependent business model. A variation on the platform business model is the double-sided platform. Within the double-sided platform there are two actors, and with multisided platforms there are more than two actors. The business model needs to hold several value propositions, one for each customer segment involved in the company’s business.

2.1.3 The Context

Value propositions and business models are always designed and used in a context. The environment in which a company is operating has its influence on it, therefore it is important to map the environment in which the models have to fit. Osterwalder’s approach to investigate the environment in which the company is operating, is used in his “Business Model Generation” book (2010).

The environment is made up of Key trends, Market forces, Macroeconomic forces, and Industry forces. Key trends shape the spacy to operate, such as technology innovations, regulatory constraint, and social trends. Market forces are customer issues in the environment such as, growing segments, switching costs, and changing jobs, pains, and gains. Macroeconomic forces are the macro trends, like global market conditions or access to resources. And the last, Industry forces, these are key actors in the company’s space, such as competitors, value chain actors, or technology providers.

2.2 Virtual Markets/e-business

The creation of value is important, as mentioned before. In recent years, business are creating new avenues for the creation of wealth by conducting business over the Internet. New value can be created with e-business, by the ways in which transactions are enabled. The rapid technological developments coupled with the growth of e-business gives the opportunities for the creation of new wealth (Amit & Zott, 2001). Pursuing new e-business strategy is complex as the focus shifts from physical to digital assets. Although an e-business strategy is complex, it represents the next generation of corporate strategic planning (Kalakota & Robinson, 2000).

2.2.1 E-business

In the last couple of years e-business has evolved considerably. Internet-based electronic business, refers to conducting value chain activities, like sales, customer services, procurement, information sharing, and coordination with suppliers, by using the Internet platform in conjunction with existing information technology infrastructure (Zhu and Kraemer, 2005).

The research of Amit and Zott (2001) has focussed on the theoretical foundations of value creation in e-business. They observed that in e-business new value can be created by the ways in which transactions are enabled. A model is created that suggest that the value creation potential of e-businesses includes four interdependent dimensions, namely: efficiency, complementarities, lock-in, and novelty.

2.2.2 Virtual markets

Virtual markets refer to settings in which business transactions are conducted via open networks bases on the fixed and wireless Internet infrastructure (Amit & Zott, 2001). Virtual markets are characterized by high connectivity (Dutta and Segev, 1999), a focus on transactions (Balakrishnan, Kumara, and Sundaresan, 1999), the importance of information goods and networks (Shapiro and Varian, 1999), and high reach and richness of information (Evans and Wurster, 1999).

Amit and Zott (2001) define reach and richness as follows; the number of people that are reachable quickly and cheaply in virtual markets; richness refers to the depth and detail of information that can be accumulated, offered, and exchanged between market participants.

The characteristics of virtual markets changes the way companies operate, and how economic exchanges are structured. Obsolete value creation theories are being challenge because value creation in e-business goes beyond the value that can be realized through the configuration of the value chain (Porter, 1985), the formation of strategic networks among firms (Dyer and Singh, 1998), or the exploitation of firm specific core competencies (Barney, 1991). P22!

2.2.3 Sources of value creation

Amit and Zott (2001) have developed a model of the sources of value creation in e-business. Value refers to the total value created in e-business transactions regardless of whether it is the firm, the customer, or any other participant in the transaction who appropriates that value. The value drivers in this model are: efficiency, complementarities, lock-in, and novelty, illustrated in figure 2.

Figure 2: Sources of value creation in e-business

Each of these value drivers enhances the value-creation potential of e-business. Therefore each value drivers, and the linkages among them, will be discussed below.

2.2.3.1 Efficiency

One of the primary value drivers for e-business is transaction efficiency (Amit & Zott, 2001). In Amit and Zott’s (2001) research, this finding suggested that transaction efficiency increases when the cost per transaction decrease. This finding is in line with the transaction theory of Williamson (1975, 1983, 1989). When the transaction efficiency gain, enabled by a particular e-business, becomes greater, the lower the costs and hence the more valuable it will be.

Efficiency can be realised in a number of ways. By reducing information asymmetries between buyers and sellers, the efficiency can be enhanced. The supply of up-to-date and comprehensive information, and the speed and facility with which information can be transmitted via the Internet makes this approach convenient and easy (Amit & Zott, 2001).

E-business also enhance transaction efficiency by enabling faster and more informed decision making, by leveraging the cheap interconnectivity of virtual markets. Thereby, Dyer (1997) suggests that information flows and reduced asymmetries of information, are important in reducing potential transaction costs.

2.2.3.2 Complementarities

The second value driver for e-business are complementarities. Complementarities are present when a bundle of goods together provides more value than the total value having each of the goods sep
arately (Amit & Zott, 2001). In earlier strategy literature, the role of complementarities is frequently appointed. Amit and Schoemaker (1993) highlighted the role of complementarities as a source of value creation, among strategic assets. Also Gulati (1999) appointed the importance of complementarities among participants in his network theory. Therefore, complementarities could increase value by enabling revenue increases. Complementarities may also lead to increased efficiency, for the customer, when the complementarity to the primary product of interest, reduce search costs and improved decision-making.

Amit and Zott (2001) suggests the potential for value creation by offering bundles of complementarities to customers in e-business. There are two ways in which these complementarities may be realised. The first way is by vertical complementarities, such as after-sales services. The second way is by horizontal complementarities, like one-stop shopping, provided by partner firms.

The complementarity enhance the value of the core product, making the primary product or service even more valuable for a customer. For e-businesses it is desirable to offer complementarities that may not be directly related to the core transaction (Amit & Zott, 2001). This value can be created by activities such as supply-chain integration, and complementarities among technologies.

2.2.3.3 Lock-in

The extent to which customers are motivated to make repeated transactions, is the potential value-creating potential of an e-business. ‘Lock-in’ may help an e-business to achieve the value-creating attributes. Lock-in prevents customers to mitigate to competitors, thus creating value for the competitor.

Customer retention can be enhanced in several ways. One of these ways is the use of loyalty programs, rewarding repeat customers with special bonuses (Varian, 1999). Another approach is to build trustful relationships with customers, by, for example, offering them transaction safety and reliability guaranteed by independent and highly credible third parties. When customers build trust in an e-business company, they are more likely to remain loyal to the site rather than switch to a competitor.

E-business enhance lock-in by enabling customers to customise the products or services to their individual needs. This mechanism exhibits that the more customers interacts with the system, the more accurate the matching results become. In this case, customers than have high incentives to use the system, which creates a positive feedback loop (Arthur, 1990).

Virtual markets enable e-business companies to create virtual communities that bond participants (Hagel & Armstrong, 1997). Such communities enable frequent interactions and create loyalty and enhance transaction frequency. Virtual markets leverage the unique characteristics such as high interconnectivity, speed of information processing, and lack of geographical constraints.

The reach of virtual markets is often enormous. Networks may exhibit externalities, which are usually positive consumption externalities. The utility that a user of the virtual network derives from consumption of the good increases with the number of other agents consuming the good (Katz & Shapiro, 1985:424). When the value created for customers increases with the size of the customer base, network externalities are presented. So, joining the community becomes more attractive for other potential members when there are already a lot members in the community.

There are also indirect network externalities that arise when a positive feedback loop exists. The presence of more members in the network makes it more attractive for potential members to join the network. This, in return, enhance the attractiveness of the network to potential buyers. Katz and Shapiro (1985) term this indirect network effect the ‘hardware-software paradigm’ due to the complementary nature of some of the components of the network in which e-business companies are embedded.

Thus, the relation between lock-in, efficiency, and complementarities are important as sources of value creation. The combined effects of all these value drivers is the driver of potential value of an e-business.

2.2.3.4 Novelty

The last primary value driver is novelty. E-businesses innovate in the way they do business, specifically in the structuring of transactions. The creation of value in e-businesses in done in novel ways, like, connecting previously unconnected parties, eliminating inefficacies in the buying and selling process, capturing latent customer needs, and by creating entirely new markets (Amit & Zott, 2001).

Novelty is linked with each of the value drivers discussed. Novelty and lock-in have two important ways in which they are linked to each other. The first is the advantage e-business innovators have in attracting and retaining customers. Second is the advantage of being the first to market as an essential prerequisite to being successful in markets that are characterised by increasing returns (Arthur, 1996; Shapiro & Varian, 1999).

The link between novelty and complementarities resides in the elements e-businesses uses, such as the resources and capabilities they combine. And finally, the relationship between novelty and efficiency. Novel assets that can be created and exploited in the context of virtual markets, have made certain efficiency features of e-business companies.

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