SOCIAL MEDIA AS A DOUBLE-EDGED SWORD: BALANCING
OPPORTUNITY AND RISK IN DIGITAL COMMERCE
ARIZONA STATE UNIVERSITY
IEE 454 – RISK MANAGEMENT
WEEK 4
A. Introduction:
Globally, digital technology, especially using the internet, has been widely used in
business massively and intensely by consumers because it provides opportunities for wider
business reach and is also able to connect with more people both through websites and social
applications (Jung et al., 2013).
In recent years, the use of information and communication technology in businesses
globally has continued to increase. In terms of internet usage in Indonesia, it reached 171.17
million people or 64.8% of the total population of 244.16 million in 2018 (APJII, 2019). Of
this number, 95 percent use the internet to access social networks (Kemenkoinfo, 2022), and
shows that 93 percent of marketers use social media to do business (Pick, 2013). In addition,
approximately 73 percent of small businesses in the United States have used social media
(Bennet et al., 2012).
More details according to We are Social (2019) the trend of active social media users in
2019 is 150 million people who are active on the YouTube platform as much as 88%,
Whatsapp 83%, Facebook 81%, and Instagram 80%. The future trend will be even higher
considering the price of gadgets is increasingly affordable. Research results in eight Arab
countries show 86% of youth respondents see social media as a suitable tool for start-up
companies (Salem & Moertada, 2012).
The number of active social media users in Indonesia reached 191 million people in
January 2022. That number is up 12.35% compared to last year Previous. According to We
Are Social (2022), the number of active social media users in Indonesia was 191 million
people in January 2022. That number has increased by 12.35% compared to the previous
year's 170 million people. Whatsapp is the most widely used social media by Indonesians,
where the percentage reaches 88.7%. This is followed by Instagram and Facebook with
percentages of 84.8% and 81.3% respectively. Meanwhile, the proportion of TikTok and
Telegram users is 63.1% and 62.8% respectively (Source: https//: dataindonesia.id accessed
on November 30, 2022). Indonesia currently has the fourth largest Facebook user base and
the fifth largest Twitter user base in the world after the USA, Brazil, India and Japan. Online
messaging applications such as Whatsapp, LINE and BBM are estimated to be used by
around 97 percent of smartphones users (Inmobi, 2014).
The existence of the internet has changed various community activities, including buying
and selling transactions. The high number of Indonesians who are getting used to online
buying and selling has an impact on the emergence of online business actors. Business actors
need to understand the changes in consumer behavior that occur so that the business
processes that are carried out can be well received by consumers. In developing an online
business process, actors need to understand the factors that have a strong influence on
consumer buying interest online.
By understanding the factors that significantly influence online purchase interest, actors
can maximize their business activities to get maximum results. Apart from the increasing ease
of business people and consumers in buying and selling relationships as a result of
technological and information developments, there are risks that must be faced, especially in
terms of trust. Fraud cases several times in the online business world so that the trust factor is
something that is highly considered by online consumers. Kim et al (2008) in their study
found that perceived risk factors and trust have a strong influence on purchase intention
which leads to purchasing decisions made by consumers.
In order to run well, a business, especially in its marketing aspect, needs to be serious in
understanding the factors that can generate consumer buying interest online, especially those
related to trust.
B. Social Media Applications :
One of the phenomenal business processes of this century is the existence of online
business or also called electronic business or e-business. According to Grefen (2015) e-
business is conducting main business activities by using information technology in an
integrated manner in order to process and communicate information. Turban & Rainer (2008)
added that online business includes various activities using computers with internet networks
that include buying and selling goods and or services, customer service, partnership
cooperation, and electronic transactions.
Structurally, e-business includes a variety of business function activities including e-
marketing, e-purchasing, e-learning, e-government, e-health, and others (Turban et al.,
2015). E-marketing is now replacing the role of traditional marketing through the use of
information technology and includes Social Network Marketing which utilizes social media
for marketing and sales activities (Ahmadinejad, 2017). This social media user is a
tremendous market potential considering how massive smartphone owners in the world have
now reached 2 billion users and will continue to grow every day (Piyush et al., 2016). The
increasing use of information technology is supported by several factors, including low costs,
increasing smartphone users, new online data storage models (cloud computing), and the
increasing number of digital services available with Software as a Service (SaaS) (Cesaroni
and Consoli, 2015).
Among various types of information technology, social media applications are the choice
for business people. Social media opens up opportunities for businesses to increase
innovation by way of sharing, collaboration and co-creation (co-creation) (Vasileidadou and
Missler-Behr, 2001; Choi et al., 2014).
Social media is a medium for socializing with each other and is done online which allows
humans to interact with each other without being limited by space and time. Social media can
be grouped into several major parts, namely:
1. Social Networks, social media for socializing and interacting (Facebook, myspace, hi5,
Linked in, bebo, etc.).
2. Discuss, social media that facilitates groups of people to chat and discuss (google talk,
yahoo!M, skype, phorum, etc.).
3. Share, social media that facilitates us to share files, videos, music, and others (youtube,
slideshare, feedback, flickr, crowdstorm).
4. Publish, (wordpredss, wikipedia, blog, wikia, dig).
5. Social games, social media in the form of games that can be done or played together.
6. (koongregate, doof, pogo, cafe.com)
7. MMO (cartrider, warcraft, neopets, conan).
8. Virtual worlds (habbo, imvu, starday).
9. Livecast (y! Live, blog tv, justin tv, listream tv, livecastr).
10. Livestream (socializr, froendsfreed, socialthings!).
11. Micro blogs (twitter, plurk, pownce, twirxr, plazes, tweetpeek).
Social media applications according to Kaplan and Haenlein (2010) are basically a group
of internet-based applications built on the basis of Web 2.0 ideology and technology that
allows the creation and exchange of user-generated content. According to Kaplan and
Haenlein (2010), there are six types of social media applications, as follows:
1. A website that allows users to change, add or delete content on the website.
2. Blogs and microblogs, which give users the freedom to express themselves on blogs,
such as Twitter.
3. Content, which is an application that allows users to share information (content) in the
form of videos, e-books and images, for example Youtube and Instagram.
4. Social networking sites, which are applications that connect users of social networking
sites to connect with each other and share information both public and private
information, an example is Facebook.
5. Virtual game world, which is an application that allows users to replicate the
environment in three dimensions (3D) to interact with others as in the real world, an
example of this application is online games.
6. Virtual social worlds that have almost the same concept as virtual game worlds but in a
freer context, an example is the second life application.
Social media has added a new dictionary to our vocabulary, where we now know not only
the real world but also the "virtual world". A free world without boundaries that contains
people from the real world. Everyone can be anything and anyone in cyberspace. A person
can have a very different life between the real world and the virtual world, which is
especially evident in social networks.
Social media erases the boundaries of humans to socialize, space and time constraints,
with this social media it is possible for humans to communicate with each other wherever
they are and whenever, no matter how far they are, and no matter day or night. Social media
has a huge impact on human life today. Someone who was originally "small" can instantly
become big with social media, and vice versa, a "big" person in a second can become "small"
with social media.
C. Benefits of Social Media Applications :
E-commerce is the process of buying and selling products, services and information
carried out electronically by utilizing computer network. One of the networks used is the
internet (Handayani and Purnama, 2013).
The internet has transformed the flow of commerce in the business world into a digital
one. Today's business mechanisms are built in a networked community. Slowly but surely,
internet penetration has changed consumer purchasing behavior in meeting their needs
(Pratiwi, 2012).
Digital marketing is a marketing activity that uses digital media using the internet which
utilizes media in the form of web, social media, e-mail, database, mobile/wireless and digital
tv to increase target consumers and to know the profile, behavior, product value, and loyalty
of customers or target consumers to achieve goals (Chaffey and Chadwick (2016), Purwana
(2017). Digital marketing is the marketing of products and services using the internet by
utilizing the web, social media, e-mail, databases, mobile/wireless and digital TV to increase
marketing and target consumers.
Nowadays, social media has experienced various developments in terms of functions,
where social media that is often visited is not only used to interact or send messages, but
social media at this time is utilized more advanced and wisely to be able to do buying and
selling business. The ease of marketing products through social media, as well as the many
benefits provided such as, wider market reach, 24-hour internet operation, shopping
comfortably, can do price comparisons and product comparisons on several online stores in
just seconds and this really allows closer and more intense communication with consumers,
and helps business people to be able to increase their sales (Adi, 2012).
If social media can be utilized properly, a lot of benefits can be obtained, for example as a
medium for marketing, trading, finding connections, expanding friendships, and others. But if
someone is used by social media either directly or indirectly, there are also many
disadvantages that will be obtained such as addiction, difficulty getting along in the real
world, autism, and others. A smart person can utilize social media to make his life easier,
making it easier for him to study, find a job, send assignments, find information, shop, and
others.
Social media is usually the main promotional medium for digital marketing. Some things
that can be utilized are various social media, such as Instagram, Facebook, YouTube, and
Twitter. In addition, promotion can also be done through websites, Search Engine
Optimization (SEO), blogs, e-commerce sites, and other similar media. Digital marketing has
a low cost. In fact, it may not cost anything at all by utilizing social media and free websites.
However, it can also take paid advertising, by utilizing the ads feature available in various
promotional media. The costs incurred usually remain affordable. This is because we can
estimate ad conversions and costs incurred.
For MSMEs, this medium is useful to access markets outside their geographical area
without requiring physical presence (Bilbao-Osorio et al., 2014), meaning that for them
geographical location, distance and time are no longer relevant (Alarcon et al., 2015), and is a
cost-effective strategy to survive and thrive (Sledge, 2014).
D. Business Risk in Social Media Applications :
Business risks in social media applications can be seen from two perspectives, namely
from the producer or business owner side and from the customer or consumer side. This can
be explained as follows.
1. From the Manufacturer's Point of View:
In a survey conducted by Deloitte Access Economics (2015) of 437 MSMEs in Indonesia,
the involvement of MSMEs in digital can be divided into four groups, namely offline
business (36 percent), basic online business (37 percent), intermediate online business (18
percent) and advanced online business (9 percent). Offline businesses are businesses
conducted without broadband access, without computers or smartphones and without
websites. While a basic online business is a business that already has broadband access, has
digital devices in the form of computers or smartphones and have a static online presence, i.e.
standard networking sites with limited information access. Intermediate online businesses
have direct involvement in social networking by doing a combination of networking sites
integrated with social media, live chat with customers. Finally, advanced online businesses
have sophisticated connectivity, integrated social networking and e-commerce.
In general, why social media is widely used, according to Nawi et al. (2017) because in
the eyes of users this media provides expectations of good performance, low risk, trust, and
entertainment which can then be utilized for business platforms. For young entrepreneurs this
media is also a powerful, useful and low-cost platform (Alayis et al., 2018). Furthermore, it
can be used for branding, market surveys, managing relationships and developing content
(Bolat et al., 2016), to improve company reputation, increase customer interest and
awareness, and promotion to new customers (Broekemier et al., 2015), as well as to influence
customer perceptions, preferences and attitudes (Abdullah & Siraj, 2018). Thus, social media
can be referred to as an electronic (virtual) marketplace where buyers and sellers meet (Gazal
et al., 2016).
Basically, the risks of having an online business are almost the same as any other
business. Every risk that occurs must be faced and overcome so as not to disrupt the business.
One of the efforts that an online businessman needs to do is to recognize the risks that can
occur when owning an online business.
Some of the disadvantages or shortcomings that exist in the use of social media include
high maintenance demands, sacrifice of time and resources to maintain relationships with
customers, in addition to having to ensure the provision of appropriate information (Fenn et
al., 2014). In addition, the use of credit card transactions is less secure, and concerns about
confidentiality issues can hinder the growth of electronic delivery (Weitz, 2000). Other
challenges for businesses using social media are time constraints, lack of technological
expertise, and limited human and capital resources (Jones et al., 2015).
The risks of owning a business through social media applications are detailed as follows:
1. Intense competition:
The number of businesses through social media applications continues to increase
along with the development of e-Commerce and the world of online business. In fact,
many people try to start a business by selling or providing similar goods or services, for
example selling the same type of product by several online businesses. This will certainly
create intense competition between one online business and another.
2. Loss or Fraud:
Fraud or other forms of loss can occur in a business. Business through social media
applications has a higher risk and is more prone to fraud because the transaction process
between sellers and buyers takes place online without meeting in person.
3. Frequently Changing Market Demand:
The high market demand is actually a good thing for businesses through social media
applications. However, if the business is not managed optimally, it can be a risk. Because
market demand tends to change from time to time. This change can be a risk for the
business if the producer does not prepare enough stock of goods to follow the many
requests from consumers. An example that happens quite often is when there is a new
trend. Consumers will most likely choose to buy trending items from an online business
that has stock of the items they are looking for. Therefore, manufacturers may lose
potential customers due to the inability of the business to provide the stock of goods that
consumers want to buy.
4. Marketing:
The marketing process in businesses through social media applications must always
be considered considering that marketing is directly related to external parties, namely
consumers. If someone cannot manage their business marketing well, it will not be able
to attract the attention of potential customers and has the potential to reduce trust
customers. For example, unattractive content and poor customer service will threaten
business marketing.
2. From the Consumer's point of view:
According to Pavlou and Geffen (2002), a very important factor to influence online
purchase interest is the trust factor. The trust factor is a key factor in any online buying and
selling. High efforts must be made by organizers of online transactions so that consumer trust
is higher, because trust has a big influence on consumer intention to make online transactions
or not to do so. Therefore, if there is no trust between the seller and the buyer, there will be
no transactions in the world of e-commerce, especially knowing that the products sold and
offered by the seller are pseudo-products, in the sense that the products sold are still only the
seller's shadow.
However, in the decision to make online purchases made by consumers, one of the
important barriers that must be considered is the risk factor. This risk relates to how a
consumer has the confidence to involve technology in various jobs done by consumers
including in terms of finding the product needed and making a purchase of the product
(McCole et al., 2010). Kim et al (2008) in their research state that the risk factor perceived by
consumers is consumer confidence regarding the potential negative results of uncertainty in
making online purchases. Meanwhile, the perception of risk according to Firdayanti (2012) is
a way for consumers to perceive the possible losses that will be obtained from their decisions
due to the uncertainty of what is decided.
Perceived risk is a measure of the perceived benefits and ease of use before buying a
product or service, based on the consumer's purchase intention. Two important reasons why
customers do not buy products or services on the internet are the safety of online shopping an
the privacy of personal information. According to Lui and Jamieson (2003), the degree of
Risk in online shopping depends on consumer perceptions in estimating the high and low
risks that will be experienced when using the internet for shopping. According to Hardiyanti
(2013), the indicators of risk perception are as follows:
a. Suspicion of fraud;
b. Product quality;
c. Price suitability;
d. Satisfaction;
e. Price comparison with product suitability.
According to Forysthe et al (2006), there are three factors that can negatively affect
consumer perceptions of purchasing products via the internet, namely financial risk, product
risk, and time or convenience risk.
According to Kim et al (2008), product risk, financial risk, and information risk are the
three main factors that can affect online shopping sites. Product risk is a risk associated with
the products traded in the online transaction. For example: defective products, products that
do not meet the promised specifications, products that do not function properly. Meanwhile,
financial risk is defined as the risk of nominal transactions that do not meet expectations that
result in consumers or sellers. For example, online transactions that are duplicated, or
duplicated caused by technological errors. Meanwhile, information risk is related to the
security and confidentiality of transactions. For example, regarding the provision of credit
card numbers or consumer personal information in the online purchasing process which is
feared to be fraudulent.
Meanwhile, partially from the consumer's point of view, the issue of privacy or
confidentiality in using social media is still a concern, therefore as prospective online
business actors they must carry out business ethics by maintaining the confidentiality of
customer data, besides that it is necessary to provide an understanding of how to follow the
confidentiality policies of each platform used to maintain the security and confidentiality of
customer data (Saefulloh, 2020).
E. How to overcome business risks on social media applications (online business):
Handling risks in business through social media applications certainly requires the right
and effective solution. The following solutions to overcome the risks of having a business
through social media applications are as follows:
1. Plan Your Business Thoroughly:
The initial planning of any business is to write down a business plan or strategy
regularly and in writing. The plan should include data from various perspectives in order
to set goals, make evaluations, and reviews. It is necessary to pay attention to strategies
in terms of operations, finance and also marketing that will be carried out.
2. Risk Management Planning:
In this planning, there are steps that can be taken, procedures and ways to overcome
business risks. This planning is different from strategy in business. For example, think of
ways to make production goods safe when distributed to consumers even though the
products produced are prone to damage. With this planning, you can reduce the risk of
loss.
3. Executing the Plan:
The next step is to follow all the plans that have been made both business plans and
risk management plans. The possibility of losses will be reduced after making careful
guidelines and planning in advance. Another benefit is that it can be easier to evaluate
the implementation of business operations in the last few periods. Furthermore, it is
identified whether there are losses and what improvements can be made henceforth if
there are losses.
4. Doing Bookkeeping:
Another important thing is to recap the bookkeeping to record the existing income and
expenditure reports. This aims to find out the profits earned or maybe the losses that
exist. Correct bookkeeping will help business people in making policies to develop the
business because of the correct and factual data.
5. Conduct Research on Customer Needs:
Intense competition is certainly one of the serious risks of online business. On the
other hand, intense competition can also be an opportunity for businesses to remain
relevant and superior. Efforts that can be made to keep online businesses relevant and
superior are by conducting research to find out customer needs. After that, we can design
the right solution to overcome intense competition in online business. The solution is to
offer favorable prices for consumers and provide products that suit customer needs.
6. Be vigilant and don't trust easily:
In online business, it's not just sellers who can commit fraud, but buyers can also cheat
sellers in various ways. Therefore, business owners must be very vigilant and not easily
trust customers. Fraud can be avoided by ensuring and requesting personal data from
customers. By having this data, business owners can easily track down the customer in
question and report them to the authorities if there is a fraud committed by the customer.
7. Providing the Right Amount of Stock:
Business people must keep up with changes in the market. The market will always
change at any time. Providing the right amount of stock is very important because if
one's business runs out of stock, it can damage the image and professionalism of the
online business.
8. Determine an Attractive Marketing Strategy:
Marketing that is able to attract customers' attention will greatly affect the
performance of an online business. If a business does not have a good marketing
strategy, the business owner needs to immediately address and implement a new strategy.
An effective marketing strategy can be achieved by maintaining communication with
customers, learning to use social media to promote the business, and offering various
promotions and discounts that can attract customers' attention.
F. Summary Material:
1. The existence of the internet has changed various community activities, including buying
and selling transactions. The high number of Indonesians who are getting used to online
buying and selling has resulted in the emergence of online businesses.
2. Social media is a medium for socializing with each other and is done online which
allows humans to interact with each other without being limited by space and time.
Social media is usually the main promotional media for digital marketing.
3. Business risk is the possibility of losses or consequences due to uncertainties that arise
from various factors such as poor management, immature business strategies or poor
company systems.
4. Business risks are divided into types, namely product risk, market risk, and financial risk.
5. Business risks through social media applications can be seen from two perspectives. 1)
From the point of view of the business owner or producer, the business risks are: Intense
competition, loss or fraud, frequently changing market demand, and marketing. 2) From
the customer or consumer side, business risks are: product risk, financial risk, and
information risk.
6. Solutions to overcome business risks through social media applications are: conduct
research on customer needs, always be vigilant and not easily trust customers, provide
the right amount of stock, and determine the right marketing strategy.
Practice And Evaluation:
1. Explain the definition of social media and business risk!
2. Describe the types of social media applications that can be used in digital marketing of a
product!
3. What are the benefits and drawbacks of social media?
4. Explain the factors that affect the risk of a business!
5. What are the solutions to business risks on social media?
6. What are the business risks from the business owner's point of view and from the
consumer's point of view?
MARKETING RISK DIGITAL
A. Introduction:
Marketing risk is a possible event that can occur at any time and have a negative impact
on the company. The development of the digital economy does make a positive contribution
to the company but is not immune to a number of risks. Digital technology is recognized as
an important driver for innovation by presenting unparalleled opportunities and capabilities
for growth and value creation. However, no opportunity can be realized without dealing with
risks (LLP, D. T. T. I. 2018).
Every company's decision on digital marketing efforts needs complex considerations, as
uncertainty and technology considerations are also quite expensive facilities. Investing in
digital marketing is an investment in the future that aims to maximize services and a
personalized approach to each individual. Digital marketing development strategies with the
widest range of components, will allow for volatile and uncertain conditions to ensure
sustainable company development so that it is necessary to maximize financial performance
and minimize market risk (Al- Ababneh, et.al. 2020). Therefore, we need to know what risks
can occur in digital marketing efforts.
B. Digital Risk and Marketing Risk Digital
Marketing risk can be said to be an adverse situation or uncertainty that has the potential
to cause the failure of the objectives of the marketing strategy marketing activities
themselves. Whereas digital risk in RSA (2019) refers to unintended and often unexpected
outcomes stemming from digital transformation and the adoption of related technologies.
Digital risks are mentioned in the form of cyber security risks, third-party risks, business
continuity risks, data privacy risks, and other forms of digital risks that add to the uncertainty
of achieving business goals. This means that it can be defined that digital marketing risk is a
bad situation or uncertainty related to digital era marketing practices or the use of digital
technology.
C. Identification of Factors Causing the Emergence of Digital Marketing Risks for
Management:
Despite the positive role of digital technology, however, factors that could potentially
trigger risks must be taken into consideration for management. In general, there are several
factors that have the potential to trigger risks for management in the scope of digital
marketing, namely:
Internal Factors:
1. HR Readiness:
Efforts to compete in digital marketing must be supported by human resources who
master digital technology. Small businesses or MSMEs may not have employees in the
position of digital analysts, but at least the owners or employees must still have insight
and basic skills regarding digital technology. If not, then the risk of falling in competition
is greater, or there is an increase in digital promotion costs but not directly proportional
to profits. Business companies must be more adaptive.
2. Technology adoption:
The adoption of new technologies remains potentially risky. Some risks cannot even
be predicted or quantified in terms of future benefits. In addition to the risk of increased
investment costs and operational costs, new technologies require adaptation by new
users. New users of digital marketing applications usually do not understand how digital
advertising mechanisms work, about data security systems, or fraud.
3. Weak knowledge of risks:
Every digital marketing medium has its advantages, disadvantages and risks. If users
do not have knowledge of the risks of using the media, then there is no anticipatory
strategy against these risks.
4. Inappropriate and unmeasurable digital marketing strategies:
Every policy in digital marketing must be measurable. In the sense that the selection
of digital channels must be able to reach the intended segments and targets or the target
number of ad impressions by viewers. For example, the policy of choosing email as an
advertising channel targeting millennial customers. Inappropriate marketing strategies
can cause various risks, especially for SMEs that have not prepared their risk
management (Rahmatin, et al., 2018).
External Factors:
1. There is no guarantee of the integrity of its users.
Internet users whether advertisers, suppliers, customers, or other parties in the case of
digital marketing are difficult to guarantee the quality or facts of the information
disseminated, their honesty, or their mentality. Each user must be able to ascertain
indications that may lead to fraud.
2. Uncertainty:
Risk is uncertainty itself. Market changes that occur so quickly will have an impact on
projecting future business prospects to be more difficult and complex. Market needs or
orientation can change at any time and customer demands are also difficult to predict
within a certain period of time. Consumer behavior becomes more unpredictable and
high digital ad impressions do not guarantee a purchase.
Uncertainty can be reflected by high fluctuations in movement; the higher the
fluctuations, the greater the degree of uncertainty. Why do fluctuations tend to increase?
There are several factors that drive the increase in fluctuations, such as: 1) Globalization
of the world. 2) Liberalization of the world. 3) Faster information process, and 4) faster
investor reaction (Hanafi. 2014).
3. Competition:
Competition in the digital era has become fierce and unbalanced. Large industries that
have stronger technological resources can enter all segments and will face small
industries. There are no restrictions on countries, distances and geographical areas,
digital advertising and products can reach every customer in any region. The gap in
technology, resources, and strategy will widen between market players.
4. Weaknesses of technology:
However, technology still has gaps and weaknesses. The reliability of the technology
is still highly dependent on the capabilities of the appropriate facilities, tools and
carrying capacity.
5. Customer expectations:
Digital promotions designed with attractive product display content, prices, or
promises in advertisements have the potential to form high customer expectations. If it
turns out that the advertised product does not match the reality received, then the risk of
dissatisfaction and negative WoM occurs until the customer loss phase. Currently, there
are many cases of customer complaints related to online product purchases on various
marketplace platforms.
6. Consumer behavior: Advertising avoidance:
Advertising avoidance behavior is the action of customers who actually dislike
advertisements. Consumers who intensively dislike advertising on the internet will still
increase negative attitudes towards internet advertising (Alwitt & Prabhaker, 1994).
Every advertisement that appears while browsing on the internet will usually be
"skipped" by the user. Ads that have been made at a certain cost are certainly redundant
because they do not get a spectacle.
7. Policy and Regulation:
Policies and regulations, for example by the government, are expected to adjust to the
development of the current digital era. For example, policies and regulations that apply
do not yet contain data security protection or even limit some aspects of digital
marketing strategies by companies.
D. Identify Potential Marketing Risks Digital:
The potential risks of digital marketing arise as a result of the natural risks of the
company as well as risks arising as a result of rapidly developing digital technology. In
general, potential risks in digital marketing can be identified as follows:
1. Cost and investment risks.
In addition to the cost risks posed by the technology itself, it is inevitable that product
development costs in the digital era can increase in a short period of time. Changes in the
competitive environment of the digital era can force management to continue to develop
new ideas to anticipate competitors who tend to be more competitive more aggressive. In
addition, digital marketing allows everything about the product or company concept to
be more easily imitated or cloned. The management must continue to be creative and
innovate so that the product concept or marketing strategy is superior to competitors.
Adaptation to market changes and demands quickly is very necessary.
2. Loss of market share:
It can be said that the internet has erased regional and geographical boundaries. Any
digital marketing information content can be accessed by everyone despite different
regions or countries. A company that operates or controls the market within a certain
geographic area will experience open competition. Potential loss of market share can
occur if there are no anticipatory steps and responses to competition.
3. Reputation risk/company and product image:
The phenomenon of "Netizen Bullying" that we see in various online media can be a
scary specter for products and companies. If there is one small mistake in the content of
the product launched, it can trigger the rapid spread of negative information (word of
mouth negative) or what we know as "Viral". The good reputation of the company or
product will be very much at stake.
4. Loss of Trust and Company Profit:
The risks of reputation and brand destruction are serious and lead to loss of trust and
even revenue or profit. Club (2015) explains that negative exposure on social media
sites, or inappropriate or unauthorized actions on behalf of a company, can result in loss
of trust and loss of revenue.
5. Technology risk:
Digital technology systems can experience errors or disruptions at any time that can
cause losses to its users. Such as internet connection disruptions have the potential to
cause the loss of many sales opportunities, product orders, or failure of digital transaction
/ payment systems. Another risk is that advertisers through digital media who pursue the
target number of impressions may be fooled by fake traffic or robot systems. The most
specific corporate risk for digital economy is a specific risk, namely technological risk
(Chernyakov & Chernyakova. 2018).
In Detloiitte LLP, D. T. T. I. (2018) explains another important aspect that must be
considered is digital resilience because of the heavy dependence on technology, the
availability of the system is non-negotiable. Potential losses due to technology failure or
technology obsolescence. Technology-related risks impact systems, people, and
processes. Key risk areas may include scalability, compatibility, and accuracy of
implemented technology functionality.
6. Digital divide:
The opening of competition in technology will certainly result in gaps between each
market/industry player. It has been said by Royle & Laing (2014) that there is a digital
skills gap between industry players. The risk of losing the dominant competition will be
experienced by industries with low technological capabilities.
E. Marketing Mix Strategy Risk Digital:
Not only identifying potential risks in general, in fact we need to further review how
digital marketing risks in the marketing mix aspect. At least this can be a consideration for
marketers in anticipating digital marketing risks.
1. Product Risk:
a. Duplication of ideas and products:
Nowadays, with the help of technological media, everyone can be creative. But
increasingly sophisticated technological media can also make it easier for others to
duplicate or plagiarize our ideas or products. Quite a lot we meet various content that
reviews electronic products to specific small parts. Of course, this can be a useful source
of information for those who want to imitate or duplicate our products.
b. Product image:
The authenticity of the products that we have maintained will be difficult for customers
to evaluate. In the marketplace, customers can access many competing products that are
similar or even exactly the same as ours products that we offer. Customers can assume that
the products we offer will remain the same as competitors' products. On the other hand,
negative testimonials from customers about our products will easily spread and eventually
have an impact on our reputation.
2. Price Risk:
a. The risk of price competition becomes more exposed.
The product pricing scheme will deal directly with competitors' prices. When the
company's prices will face directly with competitors' prices, it will force management to
take instant price change policies that are sometimes less measurable. The product image
on the price side that has been built can change drastically to respond to the market. Price
competition rarely provides benefits for producers and often takes the place of innovative
marketing and product development (Hanggraeni, 2010).
b. Price duplication.
Pricing strategy becomes more difficult. Others may duplicate the price or set the price
slightly lower than our product.
3. Marketing Channel:
a. The risk of delivering products with quality assurance to customers.
Company partners such as distributors, sub-distributors, and agents usually play an
important role because they are part of the company in ensuring the delivery of products to
customers with good quality. Digital marketing can affect the reduced role of partners,
distributors, or agents, which is caused by customers who can connect directly to the main
supplier / manufacturer.
b. The process of delivering products to customers tends to become dependent on other
parties (couriers).
The processes that occur during the delivery of products to consumers can affect the
decline in product value and quality. Many cases occur such as lost or damaged products
sent to customers through shipping services or freight forwarders.
4. Marketing Communication Risks:
a. Risks of using digital advertising media:
As social media becomes an integral part of marketing, it poses risks to brand value and
reputation. Similarly, customer profiling stands out for better customer experience, but the
profiling process must be harmonized to protect the privacy of customer data (LLP, D. T.
T. I. 2018).
b. Cloning website:
Website cloning is the duplication of a website that exactly matches the appearance of
the original website. Our advertising website can be cloned by other irresponsible parties,
and display fake contacts on it. Other irresponsible parties can utilize the identity of the
original website to achieve their goals (e.g. fraud).
c. Duplication of ad content:
The advertising content that we display can be copied by other parties. for example
advertising materials, elements of creative ideas in advertising, and so on. Of course, this
will be a loss for the original advertising product.
d. Customer complaints become more easily exposed:
Even if there are few customer complaints about our products, it will still affect
potential customers' consideration of the product.
e. The spread of negative word of mouth will be faster and threaten the company's
reputation:
Negative Word of Mouth can certainly spread quickly, disappointed customers or other
parties can share negative comments or negative testimonials about our products.
f. There is still potential for advertising performance bias:
Advertising through digital media is an option because it is possible to track ad
performance based on the number of "clicks" or impressions. However, currently the
phenomenon of fake traffic or robot systems is used by certain parties in increasing
impression ratings on several advertising channels.
F. Digital Marketing Risks for Customers:
Digital marketing risks also have an impact on customers or internet users. Here are some
digital marketing risks for customers.
1. Risk of dissemination of customers' personal data.
When consumers access commercial web pages, some websites often track personal
data about their users. However, this has been regulated by many countries such as in the
European Union which people who believe that online transactions are not secure enough
to protect disclosed payment information and tend to buy in a hurry when other groups
would be online shoppers (Suki & Suki, 2013).
2. Fake website:
Internet users or customers sometimes do not realize that they are browsing commercial
sites but are actually directed to other websites including pornographic sites.
3. The rise of advertising activities that lead to fraud.
In digital advertising, certain parties may deliberately commit fraudulent acts to gain
financial benefits, resulting in financial losses for other parties (Zhu, et.al. 2017). For
example, the rise of customers who complain about the products ordered, in reality do not
match what is in the advertisement or even the product that has been paid for is not
delivered to the buyer's address.
4. Customers have easy access to fake testimonials.
Product testimonials circulating on the internet must be traceable by customers. In order
to be attractive, many advertisers have to use video testimonials of products by past
customers. New customers should be wary of fake testimonials shared by accounts whose
goal is to get customers to buy.
G. Risk Management:
Risk may not be eliminated, but we can take steps to manage it. Risk management aims to
avoid or minimize potential losses that may arise as a result of digital marketing. Some of the
risk management steps that need to be taken are:
1. Avoidance:
If the risk remains or cannot be eliminated, then we can avoid the risk. For example,
marketers can use search engines (Example: Google ads) to avoid the risk of fraud or
privacy violations on social media.
2. Risk Retention:
If we realize that risk is unavoidable, it is better if we face the risk ourselves. In digital
marketing, a marketer still chooses to use digital media to promote his product even
though he is aware of the risks. But a marketer can be more selective and always be
careful in every step of the strategy in order to avoid the threat of risk.
3. Risk Transfer:
Risk transfer is transferring the risk to another party. If in some cases we use an
insurance company, in digital marketing we might be able to use a third party who will be
responsible for the website and data security.
4. Leveraging digital technology to manage digital marketing risks:
With all the advantages of digital technology today, it can certainly be utilized to
manage possible risks that arise. There are many programs and applications that can be
used to map and prevent marketers from risks. For example, the use of data security
applications to avoid the possibility of data loss or leakage.
5. Preventing fraud in digital marketing:
The rise of advertising fraud and fraud today, Zhu, et.al. (2017) suggested several
mechanisms that must be carried out to prevent potential fraud or fraud in advertising.
The prevention mechanisms include:
a. Digital Signature-based prevention mechanism
This type of method uses predefined features/patterns to find malicious impressions or
traffic.
b. Anomaly-based prevention mechanism.
This type of approach uses statistical analysis and historical data to find suspicious
placements, websites, or publishers, whose traffic is considered abnormal compared to
general user traffic.
c. Honeypot-based prevention mechanism.
In order to detect fraudulent activity, Ad servers (such as advertisers) may
intentionally serve a carefully defined number of bluff Ads to publishers, where the
bluff/honeypot Ads are known to be unrecognizable (e.g., too small in size or transparent)
to users, and if the bluff Ads result in interaction, such as a "click", it would go against
assumptions and imply fraudulent activity.
d. Credential-based prevention mechanism
The credentials or credibility of the publisher or website directly correlate with the
potential for fraudulent activity. To assess the credentials of the publisher, advertisers can
use crawling to find the content of the webpage and check if the content is consistent with
the tag associated with the impression.
H. Summary Material:
1. Investing in digital marketing is an investment in the future that aims to maximize service
and a personalized approach to each individual.
2. Digital marketing remains a risk for marketers and customers. Digital marketing risk is an
adverse circumstance or uncertainty associated with digital-era marketing practices or the
use of digital technology.
3. There are internal and external factors that have the potential to trigger risks for
management in the scope of digital marketing, namely, internal factors:
1) HR Readiness; 2). Technology Adoption; 3) Knowledge of risk; and 4) Inappropriate
marketing strategy. For external factors: 1) User integrity; 2) Uncertainty; 3) Competition;
4) Weakness
technology; 5) Customer expectations; 6) Advertising avoidance; 7) Policy and regulation.
4. The potential risks of digital marketing arise as a result of the natural risks of the company
as well as the risks that arise as a result of rapidly developing digital technology. In
general, potential risks in digital marketing can be identified as follows: 1) Cost and
investment risks; 2) Loss of market share; 3) Reputation risk/company and product image;
4) Loss of trust and profit; 5) Technology risk; and 6) Digital divide.
5. Digital marketing risks also have an impact on customers or internet users. Some of the
risks of digital marketing for customers are: 1) Risk of spreading customers' personal data;
2) Fake website;
3) The rise of advertising activities that lead to fraud; 4) Customers have easy access to
fake testimonials.
6. Risks may not be eliminated, but we can take steps to manage and prevent them. Some of
the risk management steps that need to be taken are: 1) Avoidance; 2) Risk Holding;
3); Risk Transfer; 4) Utilizing digital technology to manage digital marketing risks; 5)
Preventing fraud in digital marketing.
Practice And Evaluation:
1. Explain how digital marketing is defined!
2. How can internal and external factors trigger potential risks in digital marketing?
3. Mention what are the risks in the digital marketing mix!
4. Explain how digital marketing risks customers!
5. Explain how risk management steps need to be taken by management!
Publishing.
PAYMENT RISK DIGITAL MONEY
A. Introduction:
The use of digital money currently plays a very influential role in increasing the behavior
of business transactions. This is due to technological advances that have since the Covid
pandemic.
19 (early 2020-2022) causes consumers and producers to get used to transacting using digital
platforms. So that business transactions using digital must be balanced with mobile payment
methods that provide: security, speed, accuracy, reliability, convenience, flexibility and
cheapness. The trend of digitalization affects behavior in all lines of life, one of which is in
the financial sector in increasing the flow of economic turnover nationally. The increased use
of digital money can be an opportunity for businesses to improve their performance and
business sustainability.
In Indonesia, transactions using digital platforms have increased significantly every year
(see Figure 11.1 Electronic Money Transaction Value). The majority of digital transaction
users are from generations Y and Z, which is a prospective target market for businesses, and
can affect the national economy that disrupts conventional finance (Bank Indonesia, 2019).
B. Definition of Money Digital:
Digital Money (Cryptocurrency) is a means used as a means of payment or medium of
exchange for transactions via the internet (Fitriyani et al., 2021), and is the result of
innovation from financial technology (virtual money) (Rahmanto & Nasrullah, 2019), which
is used as a means of payment for business transactions that are carried out online and not in
the form of concrete objects, in the future digital money will replace paper money (rupiah,
dollar, yen and others) as a means of business transactions (Saputra, 2018), and is said to be
digital money because of its form that cannot be touched.
A digital currency is a digital representation of value issued by a private developer and
denominated by a value determined by that actor/developer. Digital currency can be obtained,
stored, accessed, and used for electronic transactions, and can be used for a variety of other
purposes, as long as the parties have an agreement (Fitriyani et al., 2021).
The fundamental objectives of currency issuance are: 1) As a nominal valuation of a
good/service; 2) As a store of value of assets owned; 3) As a means of economic transactions
in everyday life; and 4) The value of money stored and managed by the issuer is not a deposit
as stated in the Law on banking. However, the development of digital technology has
innovated in creating/issuing digital money, which is likely to replace paper money or
physically visible money.
Cryptocurrencies are cryptographically coded assets that are very difficult to counterfeit
or duplicate. Cryptocurrency is developed in a decentralized system using blockchain
technology, which is a distributed ledger managed by a unique computer network. The use of
digital currencies has the advantage of speed and efficiency in transfer costs. The
decentralized system (blockchain) also reduces the risk of overall system failure
(https://djpb.kemenkeu.go.id/portal/id/).
Most Central Banks around the world still prohibit the use of digital currencies
(cryptocurrencies) as legal tender because they are not controlled by monetary authorities
(Central Banks). However, in recent years, some Central Banks have begun to discuss the
creation of a digital currency called Central Bank Digital Currency (CBDC). The creation of
CBDC as an alternative to conventional currency must at least meet the condition that CBDC
must meet the criteria as a medium of change that is practical and low-cost as conventional
currency-based accounts (https://djpb.kemenkeu.go.id/portal/id/).
C. Legal Basis of Money Digital:
The need or motivation of a country in developing digital money depends on the
economic conditions, needs, lifestyle of its citizens, especially the information technology
infrastructure is very concerned. The payment system determines the smooth flow of goods
and services.
D. Types of Money Digital:
The current issuance of digital money (cryptocurrency) is motivated by the need for a fast
transfer process that can cross national borders at an efficient cost. Decentralized blockchain
technology will facilitate digital money transactions without formal banking system
arrangements following complicated administrative procedures for some people
(https://djpb.kemenkeu.go.id/portal/id/).
Types of Digital Money based on whether or not the holder's identity data is recorded at
the digital money issuer is divided into:
1. Registered Digital Money:
It is Digital Money whose holder's identity data is recorded/registered with the
Digital Money issuer. In this regard, the issuer must apply the principle of knowing the
customer in issuing Registered Digital Money. The maximum limit of the value of
Digital Money stored on chip media or servers for registered types is Rp 5,000,000.00
(five million Rupiah).
2. Unregistered Digital Money:
It is Digital Money whose holder's identity data is not recorded/registered with the
Digital Money issuer. The maximum limit of the value of Digital Money stored on chip
or server media for unregistered types is Rp 1,000,000.00 (one million Rupiah).
E. Benefits of Using Digital Money :
The comparative advantages of using digital money over conventional money are: 1)
Reduction of printing costs; 2) Practical storage (storage is enough with the help of digital
media); and 3) Able to mitigate the emergence of shadow banking (financial activities carried
out by non-bank institutions outside the scope of banking system regulation), which is
common in developing countries. For this reason, the future payment platform must be able
to accommodate payments, both in the form of conventional money and digital money
(ledgermatic, which is one of the digital treasury management systems that can accommodate
the use of conventional and digital money simultaneously).
The use of Digital Money as a means of payment can provide the following benefits:
1. Provides convenience and speed in making payment transactions without the need to
carry cash.
2. No longer accepting change in the form of goods (such as candy) due to merchants not
having small change.
3. Highly applicable for mass transactions that are small in value but high in frequency,
such as: transportation, parking, tolls, fast food, and others.
F. Risks of Digital Money (cryptocurrency)
The trend of digitalization is affecting the economy, changing the transaction patterns of
both individuals and corporations, and disrupting conventional functions, not least in the
financial sector. These trends create both opportunities and risks presents new challenges for
the authorities. The policy challenge for authorities is to find the right balance between
optimizing the opportunities brought by digital innovation and mitigating risks.
Although on the one hand there are several benefits of Digital Money, on the other hand
there are risks that need to be addressed with caution from its users, such as:
1. The risk of Digital Money is lost and can be used by other parties, because in principle
Digital Money is the same as cash which if lost cannot be claimed to the issuer.
2. The risk is due to the lack of understanding of users in using Digital Money, such as
users not realizing that the Digital Money used is attached twice to the reader for the
same transaction, so that the value of Digital Money decreases more than the transaction
value.
Other risks that cryptocurrency faces include (Saputra, 2018):
1. Cryptocurrencies do not have a clear classification. It cannot be ascertained whether
cryptocurrencies are currencies or commodities.
2. The general public's understanding of cryptocurrency is still unclear, resulting in a lack
of acceptance of cryptocurrency in Indonesian society.
3. The existence of a scam is an act of fraud that results in a shift in people's trust in
something. For example, in Indonesia people are accustomed to the persuasion to get rich
quickly through an unclear MLM or Multi Level Marketing, and finally have to end up
with a scam. This also causes people to show skepticism towards cryptocurrency.
In addition, there are other requirements specified in Indonesian laws and regulations,
especially Government Regulation No. 82 of 2012 concerning the implementation of
electronic systems and transactions (PP PSTE), It states: "In the implementation of the
financial technology authority and Bank Indonesia Regulation Number 19/12/PBI/2017
concerning the Implementation of Financial Technology, it has been formally regulated
regarding the prohibition of the use of virtual currency. The impact of using virtual currency
from the perspective of Indonesian law can cause various kinds of crimes that are detrimental
in several aspects, including economic aspects, legal aspects, and state security".
G. Summary Material:
1. Digital Money (Cryptocurrency) is the result of innovation from financial technology
(virtual money) in the form of a means used as a means of payment or medium of
exchange for transactions via the internet.
2. The current issuance of cryptocurrencies is motivated by the need for a fast transfer
process that can cross national borders in a cost-efficient manner.
3. Types of Digital Money based on whether or not the holder's identity data is recorded at
the digital money issuer is divided into: Registered Digital Money, and Unregistered
digital money.
4. Some of the risks that need to be addressed with caution by users of digital money
include:
a. Risk that Digital Money is lost and can be used by other parties;
b. The user may not realize when the digital money used is tapped twice on the reader
for the same transaction, resulting in the value of the digital money being reduced by
more than the transaction value;
c. For Cryptocurrency, it still does not have a clear classification, whether it falls into the
category of currency or just a commodity;
d. The impact of using virtual currency from the perspective of Indonesian law can cause
various kinds of crimes that are detrimental in several aspects, including economic
aspects, legal aspects, and state security.
Practice And Evaluation:
In order to understand the material of this chapter well, it is necessary to practice the use of
digital money services. As for the exercise:
1. Make business transactions using digital money.
2. Explain what benefits you can get from your business transactions!
STARTUP BUSINESS TRENDS AND POTENTIAL RISKS
A. Company Definition Startup:
In language, a startup is defined as a business that has just begun operations, as quoted
from the Cambridge dictionary: a business that has just been started.
In a more academic formulation, Steve Blank, a startup business owner and lecturer at
Standford University and Harvard University defines it as a temporary organization that seeks
a business model that can be used repeatedly and can be measured (Blank & Dorf, 2012).
Startups are also defined as small-scale, new and independent companies founded by
several individuals, where they (the founders) also work in the company (Birley & Westhead,
1994). Furthermore, Eric Ries (2011), in his book The Lean Startup defines it as a man-made
institution designed to create new products or services under conditions of extreme
uncertainty.
Based on these three definitions, it can be understood that a startup company is a newly
established business venture by several individuals who are also involved in working in it and
are not tied to other business institutions for the purpose of creating products or services with
a specific business model in an uncertain business environment.
Montani, et al (2018), mentioned four characteristics, startups are identified with
characteristics among others:
1. have a minimum of 50 employees and a maximum of 150 employees;
2. Less than 10 years old;
3. Be independent; and
4. Being in a limited geographical environment.
According to Blank & Dorf (2012), the search for business models is done scientifically
by proposing hypotheses about certain consumers or markets. This hypothesis is then
followed up by testing or validating the results based on facts when operationalized in the
business field. It is further stated that a startup company typically starts with the formulation
of a company vision by its founder. This vision is about a product or service that is expected
to be a solution to the problems faced by consumers.
For this reason, developing products that meet the needs of the market is an important
factor for startups. As a newly established and startup company, the products developed are
usually designed with a content or composition of services that are completely different from
products made by MSME and large-scale companies. This is motivated by the understanding
that startup companies in the business context are not small or medium-sized companies,
which issue products just like large-scale companies. Therefore, in the process of making
products, startups can be identified from two main processes called consumer discovery and
consumer validation.
B. Company Trends Startups:
The emergence of startups in the world according to several sources began in 1938.
According to Erlanger & Govela (2018), the reference as the earliest startup company in the
world is Hewlett Packard (HP). The company is a computer company founded in the Bay
Area, Palo Alto, California, United States. The company's brand is named after its two
founders, Michael R. Hewlett and David Packard. Hewlett and Packard were two students
from Standford University. They were said to be inspired by the lectures of Dr. Frederick
Terman. The professor Dr. Frederick asked the two to establish their own computer company
in the region rather than working for a well-known company in the East, United States (US).
Dr. Frederick's advice is what ultimately led the two HP Computer founders to realize a
startup computer company from a car garage in the suburb of Palo Alto, which is now better
known as Silicon Valley.
Seven decades later, the startup phenomenon began in Indonesia in 2015. Where the
government recorded there were around 62 startup companies at that time. The number has
increased quite drastically to reach 2,229 companies in 2021. This number places Indonesia
fifth in the world (cnnindonesia.com, 7/6/2022).
An interesting development of startup companies in Indonesia is in terms of numbers.
According to government records (cnnindonesia.com, 11/7/2022), the number of startup
companies in Indonesia has now reached 2,391 companies engaged in various sectors,
ranging from technology, e-commerce, fashion, fisheries, vehicle sharing, financial
technology, online investment, digital wallets, education, and games.
Some startup companies then grew into Unicorns (asset valuation value reached 1 billion
USD or Rp14.3 trillion) driven by the high interest of investors to invest their funds in startup
companies such as Gojek, Tokopedia, Bukalapak, OVO, Traveloka and Ajaib
(cnbcindonesia.com, 11/6/2022). Even two of the startups have entered the category with a
market price of up to 10 billion USD or Rp159 trillion.
C. Startups and Potential Losses:
The presence of startups cannot be separated from the factors of new market growth,
access to technology and capital resources (Gardino et al., 2014). In general, startups are
characterized by being small in size at the time of establishment, having no operational
history, focusing on technology-based and innovative products, as well as have the ability to
increase the volume of activities as the market grows (scalable market).
However, the rapid growth of startup companies has been severely challenged by the
economic turmoil of the past decade. A wave of layoffs cannot be anticipated, due to the
strong economic pressure on the survival of startup companies. Some companies that have
taken layoff policies include Zenius, LinkAJA, Sicepat Express and GOTO
(cnbcindonesia.com, 10/07/2022). The number of employees laid off by GOTO reached
1,300 people (cnbcindonesia.com, 18/11/2022).
These layoffs are a consequence of the efficiency policy implemented by the startup's
management. This policy is taken to nourish the financial aspect, because startups are
generally very dependent on the injection of investor funds. When the investment spent is
large enough, but business growth and return on investment have not yet been achieved, the
most logical way out is by means of efficiency, reducing operational costs, one of which is in
the form of reducing the number of employees and rationalizing business operations
(cnnindonesia.com, 7/6/ 2022).
In addition, based on media reports, it was also revealed that there were four startups that
had to close their operations during the Covid-19 pandemic in Indonesia, namely: Airy
rooms, this company develops a hotel aggregator business like AirBnB and must stop
providing its business services since May 31, 2020. The main reason is the significant decline
in demand for hotel occupancy caused by the Covid-19 pandemic (cnbcindonesia.com,
10/7/2022). The other three companies are Stoqo, which is engaged in selling groceries and
culinary delights as well as being a supplier of raw materials for restaurants. Last operated on
April 22, 2020. Then, Qlapa, this startup lost its competition to Tokopedia and Buka Lapak.
After operating for four years, it finally closed in 2019. Finally, Sorabel, due to running out
of capital, this company engaged in e-commerce fashion finally closed on July 30, 2020.
Not only that, Indonesia's largest technology startup GOTO, which just released its shares
to the public through an IPO on the IDX, also suffered huge losses. The market capitalization
value at the time of the IPO on the stock exchange reached IDR 400.31 trillion, while in early
December 2022 the market capitalization value of the company's shares fell to IDR 118.44
trillion and posted a loss of up to 281.56 trillion (Tempo.com, 9/12/2022).
The fact of startup business losses is not just a phenomenon of our time. In the 1990s, in
the US, there was also a large-scale loss that befell a startup business that was initially
predicted to be able to absorb a large number of consumers. The startup was called Iridium.
The brick-sized cellular phone device was scheduled to be welcomed by consumers, due to
its technological advantages and the breadth of coverage and connectivity supported by
technological factors and sophisticated satellite communication infrastructure.
However, Iridium encountered something unexpected: five years after its launch, cellular
technology found that internet coverage was becoming more widespread in all cities around
the world. Likewise, consumers had begun to switch to less bulky cellular products. These
changes in consumer tastes and network availability made Iridium's massive investment
ineffective and even loss-making.
D. Source of Business Problems Startup:
How can a start-up company whose presence has received a positive response from the
media and the public, not long afterward have to face a difficult situation: losing money and
having to take the policy of terminating its employees.
It turns out that this is a common problem faced by startups. In America, where startups
have emerged as economic powerhouses, they have the same problem. Prof. Tom Eisennman
(2021), a lecturer and researcher in the field of entrepreneurship who has observed the growth
and decline of startups in the US, revealed that in general, among startups, there is a lack of
confidence. Venture capitalists (investors) consider two things to be the cause of startup
losses: the horse and the jockey.
The horse here refers to the opportunities that startups have. He admits that startups do
have business ideas and opportunities that are unique from large-scale companies. They are
able to see business opportunities that are not seen by large companies in general. Even
though these opportunities do not always support the success of their business. Meanwhile,
the jockey is a symbol of the founding figure of the startup itself. This view has become
mainstream even among startups.
However, Eisenman says the causes of failure and losses experienced by startups are not
solely due to these two factors. From his studies and experience developing startups,
Eisenman added several other sources of problems such as:
1. Misunderstanding consumer demand.
This happened because they were caught off guard by the good response from early
adopters, who then followed up quickly. Because what they market is a completely new
product and different from the usual products, there are consequences that they must
accept, namely educating and re-engineering their products. For both of these things, of
course, it costs a lot of money. Eisenman's findings are confirmed by Blank & Dorf's
(2012) statement that startup development by relying on the founder's vision alone is not
enough. Offering products and services immediately without understanding the actual
potential needs of consumers is the beginning of the bankruptcy of a startup (business).
2. Stuck with speed.
This is when investors discover business opportunities and startups are able to
capitalize on these opportunities to grow faster. This then encourages people with
(venture) funds to invest in startups and ask them to expand immediately. However, what
happens is that the opportunity and the target market are saturated. As a solution, they
have to expand their market to find other segments that are more promising. At the same
time, competing companies also engage in price wars by offering products at much lower
price levels. This condition makes startups respond in the same way, resulting in a cash
burn in search of new customers. Unfortunately, when startups are in this position,
investors are no longer committed to adding value to their investments.
3. Need help.
At this stage, startups need help from both venture capitalists and top managers. From
venture capitalists, what is needed is an injection of fresh funds because it is needed to
get consumers. Likewise, top management who have managerial skills and are able to
solve problems. The absence of a top management figure who can function in managing
aspects of marketing, production and human resources will keep the startup in trouble
without a solution.
4. Waiting for a miracle.
Startups will typically face a variety of business challenges such as educating
consumers to change their behavior, mastering cutting-edge technology, gaining
government support and seeking large amounts of funding. Any failure in these
endeavors will certainly cause problems for investors.
Other sources of problems according to (Ries, 2011) are:
1. Uncertainty, even though startups have developed a good strategy and work plan like a
large-scale company, it is impossible to implement it in startups, because the business it
runs is full of uncertainty.
2. Because traditional management patterns fail to solve problems, startup entrepreneurs
and their investors often find solutions by running as is. There is an assumption that if
management is the problem, then disorganization is the solution. Unfortunately, this is
never the solution.
In a similar perspective, Rauch (2019) revealed that there is a phenomenon among
venture capitalists when faced with a choice between growth and profitability, they tend to
choose startups that have growth potential. Some investors are even ready to lose money in
order to pursue market (consumer) growth and ignore profits. This choice can be identified
from a number of startup companies, both domestically and in other developed countries such
as the US and Europe, that have never made a profit from their business activities. Some of
these include Uber.
The company, founded by Garret Camp and Travis Kalanick in 2010 in San Francisco,
USA, initially saw an opportunity to eliminate the taxi industry with a market value of up to
USD100 billion. The opportunity was seen in the weaknesses of the conventional taxi
business, which offers expensive fares, inconvenient services, and difficulty in finding a taxi
when needed (Forbes, 2017). In contrast, Uber offers a more attractive, innovative, low-cost
urban mobility business model and an efficient payment system with fares 30% lower than
conventional taxis. On the other hand, Uber also offers high pay and more flexible working
hours to vehicle owners who are recruited as partners.
This disruptive business model caught the attention of consumers and Uber's business
expanded rapidly. In 2017, according to Len Sherman's notes published by Forbes Online
Magazine, Uber was able to raise USD11.5 billion from 18 rounds of investment from
venture capitalists. At that time, Uber's enterprise value reached USD68 billion. With
considerable capital support, Uber has expanded to 737 cities in 84 countries, including
Indonesia.
Despite its success in disrupting the conventional taxi industry, unfortunately, according
to Sherman (2017), the market Uber entered was unregulated, easy to enter by competitors,
high variable costs, low economies of scale and high competition on the price side. In the
second quarter of 2018, Uber recorded a net loss of USD 891 million (Wilhelm, 2018).
Some investors have the ability to continue supporting startup funding, even if the
company is not yet able to generate profits.
In Indonesia, the amount of losses of startup companies reaches hundreds of trillions of
rupiah. Media reports stated that in the Vision Fund company alone, the loss reached IDR
344 Trillion (USD 23.1 billion). This loss occurred as a result of the weakening valuation of
the investments they had made in several companies such as GOTO, e-fishery, and Modalku.
In addition to these three companies, Vision Fund, which is also a subsidiary of SoftBank,
also invested a large amount in Grab (cnbcindonesia.com).
E. The Role of Venture Capitalists
Venture capitalists are investors who provide funds to companies with high growth
potential in exchange for ownership of the company's shares (Investopedia.com). Venture
capitalists are crucial to the success or failure of startups. This is supported by the fact that
venture capitalist companies as investors often provide certain targets and achievements that
must be realized by startup companies. For example, if the venture capitalist is oriented
towards customer growth, then in response the startup company must expand by getting
additional customers.
In the literature, venture capitalist companies fall into three categories: 1) Financier; 2)
Mentor; 3) Portfolio Operator. Within these three positions, venture capitalists have different
roles.
In their capacity as financiers, venture capitalists act like banks providing funds. They are
not involved in the operations of the startup company at all (Teten et al, 2013). Most venture
capitalists take on the role of mentor. In this context, their personal involvement and
professional network are expected to improve the company's portfolio. What distinguishes
between mentors and portfolio operators is that while mentors are more reactive, portfolio
operators are proactive. Venture capitalists who act as portfolio operators improve
performance through a systems and process approach. This means that they are directly
involved in system development and change and are active in the operational activities and
managerial processes that take place in the startup.
Based on the above description, it can be concluded that apart from the founders and
opportunities, as well as mistakes in defining the market, the source of the problem of failure
and loss of startup companies is also determined by the venture capitalists who fund them.
F. Summary Material:
1. Startups are growing as entities that initially promise positive growth and business
potential.
2. The ability to disrupt existing markets, potential funding, market opportunities and
innovative business models make the presence of these companies phenomenal. The
sectors that startups enter are increasingly diverse, ranging from the computer device
business, e-commerce, gaming, lodging and food aggregators, payments, financial
technology, to courier services.
3. There is a tendency to pursue customer growth and focus on how to get customers for
some venture capitalists is more important than getting profits.
4. Some startups are forced to shut down, when venture capitalists are no longer able to
fund their unprofitable business activities.
Practice And Evaluation:
1. What distinguishes startup companies from MSMEs and large-scale companies in terms
of the products and services created and their characteristics?
2. The failure of startup companies is often attributed to the weakness of the founders and
the vagueness of the target market. In addition, the role of venture capitalists is also a
determining factor. What is the right strategy for startup companies to avoid losses and
be profitable?
3. One of the consequences that must be taken by some startup companies that are
overwhelmed by the problem of operational costs is to terminate employment (PHK). Do
you think the layoff policy is appropriate to avoid the risk of loss? Then, what is your
analysis so that the startup business can recover financially and be able to generate
profits?
