More specifically we investigate how Internet technology can be applied to enable new business models such as direct selling, bundling and cross-selling, which in turn may change the structure of entire industries. This has left the industry wondering whether its structure may change to a multi-tier supply chain of specialized businesses similar to the manufactures, wholesalers and retailers seen in other industries. Furthermore, the application of Internet technology may provide incentives for firms to refocus on their core competencies and adapt them to gain strategic advantage and maximize the return of their knowledge, skills and other assets. In general, every business faces decisions regarding what to do and how to organize for it. To Specialize or Not to Specialize One set of important decisions is whether to be specialized or vertically integrated.
Cost is one major trade-off here.
Vertical integration tends to cause higher production cost but lower coordination cost than specialization. Typically, outside suppliers are able to produce inputs cheaper than in-house operations. Observations suggest that Internet technology has the potential to reduce transaction costs significantly. That would provide an economic incentive to move to specialization and market coordination using Internet technology. One indication for this shift toward specialization is the emergence of electronic markets and market makers in and across the many vertical markets.