Electronic Business Models

Copyright © 2003 Sherif KamelCopyright © 2003 Thomson Learning/South Western

Copyright © 2002 Marketspace LLC

Electronic Business ModelsElectronic Business Models

Dr Sherif Kamel

The American University in Cairo



Outline

Components of business models.

eBusiness and change.

B2B business models.

B2C business models.



Business models — today’s objective

Where will the business compete?

Where will the business compete?

How will the business win?

How will the business win?

To develop an understanding of business models for the networked economy



Components of a business model

Value clusterValue cluster

Marketspace offeringMarketspace offering

Resource systemResource system

Financial modelFinancial model

Developing a business model in the networked economy requires four key choices on the part of the senior management:

• Specify the value proposition or the value cluster for the business

• Articulate the online product, service and information offer

• Define how the company needs to align its resources to deliver the value proposition

• Define and select the most appropriate revenue model to pursue



Value proposition/cluster

Value ClusterValue Cluster




The first step in the articulation of the business model is clearly specifying the value proposition or the value cluster for the business:

Defining the value proposition or the value cluster requires managers to answer the following questions:

• Which target segments should the company focus on?

• What is the combination of customer benefits that is offered?

• What makes the firm and its partners better positioned to deliver the offering than anybody else?



Value proposition/cluster

Target SegmentsTarget

Segments

The definition of the value proposition is the result of a combination of choices about the customers, the benefits offered and the unique capabilities of the firm:

“The special occasion segment”

Key Benefits Offered


Unique Capabilities

Unique Capabilities

Value Proposition

Value Proposition+ +

• Online experience• Unique, broad product line of complementary gifts

PC Flowers and Gift

PC Flowers and Gift

• Fresh flowers• Complementary gifts• Low prices

“PC Flowers & Gift serves the special occasion segment by providing fresh flowers and unique complementary gifts”

FTD.comFTD.com“Mid- to high-end market”

• Strong brand name• Market Communication• Supplier network

• Easy delivery of flowers

“FTD.com provides the mid- to high-end market with the easiest way to send flowers thanks to its extended network of suppliers”



CarPoint Example

Target SegmentsTarget

Segments

CarPoint’s value cluster offers benefits that address multiple segments of customers:



Unique Capabilities

Unique Capabilities

Value ClusterValue Cluster+ +

CarPointCarPoint

“The intimidated by the process”

“The efficiency of the Internet makes selecting and purchasing your car easier”

Knowledge of the Internet

Software development expertise

Information about cars and their prices

Help on how to deal with dealers (tactics used, etc.)

Extensive information

- In different formats (3D views, pictures, videos) - From different sources (i.e., Kelley Blue Book)

“The information seekers”

“Provides a one-stop source with all the necessary information to make a car purchase”

Microsoft brand name

Network of partners



Marketspace offering

Value ClusterValue Cluster

Marketspace OfferingMarketspace Offering

Resource SystemResource System

Financial ModelFinancial Model

The next step is to articulate the online product, service and information offering:

Defining the Marketspace offering requires managers to complete the following sequential tasks:

• Identify the scope of the offering

• Identify the customer decision process

• Map the offering to the consumer decision process



Scope of the offeringThe scope of the offering refers to the number of categories of products and services offered on the site:

Category-Specific DominanceFocus on one product category

Continuum of Scope

Cross-Category DominanceFocus on a large number of categories



MetamarketsThe term ‘metamarkets’ refers to sites that group products and services that are closely related in the mind of customers:

BabyCenter.com offers a good example of a “goal-derived” metamarket. The site’s products and information focus on one goal: raising a healthy child.

• Shopping for baby and maternity products

• Support community for parents

• User personalization

• Reference information

• Support and help from experts



Customer decision process

Flowers Example

DisposalDisposal

LoyaltyLoyalty

SatisfactionSatisfaction

Purchase decisionPurchase decision

Evaluation of alternativesEvaluation of alternatives

Information searchInformation search

Problem recognitionProblem recognition

Pre-purchase

Purchase

Post-purchase

Need recognition, potentially triggered by a holiday, anniversary or everyday events

Search for ideas and offerings, including:– Available online and offline stores– Gift ideas and recommendations– Advice on selection style and match

Evaluation of alternatives along a number of dimensions, such as price, appeal, availability, etc.

Purchase decision Message selection (medium and content)

Post-sales support– Order tracking– Customer service

Education on flowers and decoration Post-sale perks

The second step in the construction of the online offering is the articulation of the customer decision process for the various product categories:



Mapping the offering to the decision process

The last step in the construction of the online offering is mapping the products and services onto the customer decision process:

Customer Decision Process

Need Recognition

Search for Ideas and Offerings

Purchase

Decision

Post-Sale Support and

Perks

Evaluation of Alternatives

What occasions trigger the need for my product? What tactics can be used to stimulate demand?

What information would the consumer need to make a selection?

What are the key evaluation criteria that the consumer will use to evaluate my product/service? What information should the website offer to make the consumer comfortable with his or her choice?

What functionality should the site present to communicate privacy, trust and security?

What post-sale services can the website offer to create loyalty?



Resource system

Value clusterValue cluster




The third step is to define the resource system and how the company must align it to deliver the benefits in the value proposition:

A series of activities is required to construct a resource system:

1. Identify core benefits in the value cluster.

2. Identify capabilities that relate to each benefit.

3. Link resources to each capability.

4. Identify to what degree the firm can deliver each capability.

5. Identify partners who can complete capabilities.



Step #1 — Identify core benefits

Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service

Widespread, Easy Access


High Quality of Flowers


The core benefits must be identified in the construction of the value cluster:

1-800-Flowers.com serves the “mid- to high-end market” with a broad gift assortment, fresh flowers, reasonable prices and easy access because of its strong brand name, product and media partnerships and bricks-and-mortar network of franchises.



Step #2 — Link capabilities to benefits

Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service





Managers need to identify which capabilities are required to deliver each benefit, regardless (at this point) of the ability of the company to access or develop that capability:

For 1-800-Flowers.com, the benefit “widespread, easy access” is linked to four capabilities: strong brand name, wide reach to customers, multiple points of contacts and a popular website.

Wide Reach to Customers

Wide Reach to Customers

Multiple Contact Points


Popular WebsitePopular Website

Strong Brand Name

Strong Brand Name= Capabilities

= Core benefits



Step #3 — Link resources to capability

Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service

Widespread, Easy

Access

Widespread, Easy

Access



After the capabilities are identified, the firm should determined the resources necessary to deliver each capability:

Wide Reach to CustomersWide Reach to Customers




Strong Brand Name

Strong Brand Name

TelephoneTelephone

OnlineOnline

Franchise Stores

Franchise Stores

CatalogCatalog

3,000 Affiliates3,000 Affiliates

= Activities & assets

= Capabilities

= Core benefits



Steps #4-5 — Ability to deliver capabilities

Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service





The next steps assess whether the company has all the necessary capabilities in-house or if it has to look outside and select the most appropriate partners to complete the missing capabilities.

1-800-Flowers.com would not be able to deliver the capability “wide reach to customers” alone, and therefore would need to create partnerships. Companies like MSN, AOL and Snap are potential partners.

Wide Reach to CustomersWide Reach to Customers




Strong Brand Name

Strong Brand Name

= Activities & assets

= Capabilities

= Core benefits AOLAOL

MSNMSN

SnapSnap

StarmediaStarmedia

= Partners



Type of financial modelsA variety of financial models can be used to assess the value of the business model that follows from the resource system. Three examples are:

Revenues Models

Revenues Models

Shareholder Value ModelsShareholder Value Models

Growth Models

Growth Models

• Identify the flow of cash into the organization

• Assess how the company intends to generate cash flow or shareholder value

• Assess how the company will be able to drive revenue growth



Revenue modelsWhile firms can pursue a number of revenue models, some are used most frequently:

AdvertisingAdvertising

• Advertising revenues can be generated through the selling of ads, site sponsorships, event underwriting, etc. (e.g., Yahoo, AOL, Business2.com)

Product, Service, InformationProduct, Service, Information

• Revenues can be generated from the sales of goods and services (e.g., Amazon, CDNow, Buy.com)

TransactionTransaction

• Revenues can be accrued from charging a fee or taking a portion of the transaction sum for facilitating a customer-seller transaction (e.g., Schwab, eBay)

SubscriptionSubscription

• Website can gain revenues by offering subscription services for information (e.g., www.FT.com, www.NYTimes.com)



Porter strategy model Key concepts:• There are only three basic strategies• Each implies a different business model• Firms can pursue only one strategy at the time

DifferentiationDifferentiation CostCost NicheNiche

• Requires constant innovation and leadership on the benefits that matter most to the customer

Business Model

Business Model

Networked Economy Example

Networked Economy Example

• Focus on gaining competitive advantage on costs while maintaining parity level on differentiation

• Focus the business on a particular segment of the market and then pursue either differentiation or cost strategy

• www.Travelocity.com • www.Lowestfare.com

• www.Lastminute.com

Possible Strategies



1980s… Company vs. company

1990s…Supply chain vs. supply chain

2000s+…Business model vs. business model

eBusiness changes - basis of competition



eCommerce environment

Macro-Environment

Suppliers Competitors Intermediaries Customers

TechnologyInnovation

Trends

SocietyPublic opinion

Moral constraintsEthical constraints

Organization

Micro-Environment

Country SpecificEconomic factorsLegal constraintsCultural factors

InternationalEconomic factorsLegal constraintsCultural factors



B2B business models

Business models and marketplace control1. Suppliers

2. Customers

3. Intermediaries

Other business models1. Virtual corporation

2. Networking between headquarters and subsidiaries

3. Online services to business



1. Supplier-oriented marketplace

Most common B2B business model.

Environment for most of over 85% of the manufacturer-driven electronic stores.

Individual consumers and business buyers use the model.

Architecture is the same for B2C.



Customer’sOrder

Information

Supplier’sElectronic Store

Supplier’sProductsCatalog

B2C ECB2B EC

Consumer

Consumer

BusinessCustomer

BusinessCustomer

Supplier-Oriented B2B/B2C marketplace architecture



Cases

Dell Computers sold 90% of their computers to business buyers over the Internet.Cisco sold 1 billion US dollars worth of routers, switches and network interconnections devices in 1998 through the Internet.Need to have a good and dynamic web site and a group of loyal customers.The model is not convenient to large and frequent buyers.Information stored on the suppliers servers and not on the buyer’s information system.B2B and B2C platforms differ in terms of shopping cart characteristics.



Case: www.ingram.com

Computer Reseller Ingram Micro.

Open only to existing and subscribed customers.

Building loyalty with its frequent buyers.

Sellers get rid of surplus goods and buyers are offered huge discounts.

Percentage of gain could be 600% more than offline auctions, on average.



www.ingram.comwww.ingram.com



2. Buyer-oriented marketplace

Ideal for large and frequent buyers.

Big buyers should open their own marketplace.

The marketplace is open on the buyer’s servers and suppliers are invited to bid on the announced RFQs.

Great opportunity for competitive and committed suppliers.



Buyer-oriented B2B marketplace architecture

Buyer’sElectronic Store

Buyer’sRequesting Products

Catalog

Supplier’sBid Information

BusinessSupplier

BusinessSupplier



Cases

GE and Boeing are good examples.

It is becoming to be known as tender sites.

Introduction of online directories listing all RFQ sites.



www.ge.com www.ge.com



www.boeing.com www.boeing.com



Cases

Boeing’s PART, www.procure.net, www.manufacturing.net and www.industry.net

PART links Boeing to 300 key suppliers of its maintenance parts.

www.procure.net – Targets maintenance, repair and operations purchases– Online since 1996 with 30 seller sites and 100,000 products listed in electronic

catalogs. – 1 million hits per month. – No registration, but only firms with validated information can buy from the

seller sites.

www.industry.net has over 275,000 members from 36,000 organizations (1998).

10,000 visitors daily directed to 53 seller sites.

www.industry.net charges between 2,500 and 250,000 US dollars for the online catalog searching.



3. Intermediary-oriented marketplace

The market place where consumers and business buyers meet.

Architecture is very close to that in the B2C cases.



Intermediary’sElectronic Store

Supplier’sProduct

Information

BusinessSupplier

BusinessSupplier

Customer’sOrder

InformationSharedProductCatalog

BusinessCustomer

BusinessCustomer

Intermediary-oriented B2B marketplace model



www.techsavvy.com www.techsavvy.com



www.travelocity.com www.travelocity.com



Virtual corporation

The most up-to-date re-engineered form of organizational structure = Virtual Corporation.

Typical organization with business partners sharing costs and resources for the purpose of producing a product or service.

Mainly dependent of B2B platforms.

Modern VC is a network of creative people, resources, and ideas connected by online services and/or the Internet.



Virtual corporation goals

Each partner brings itscore competence to

form an all-starwinning team

Each partner brings itscore competence to

form an all-starwinning team

Excellence

Resources of the business partners are

frequently under utilized, could be more profitable

in the case of a VC

Resources of the business partners are

frequently under utilized, could be more profitable

in the case of a VC

Utilization

VC can find and meetmarket opportunity

Better than an individual company

VC can find and meetmarket opportunity

Better than an individual company

Opportunisim



B2B platform for virtual corporation

Electronic mail

Desktop video conferencing

Knowledge sharing

Groupware

EDI

EFT



Networking between headquarters and subsidiaries

Franchiser vs. Franchisee

Electronic mail Message boards Chat rooms Online corporate data access



www.marriott.com



Case: Marriott Hotels

Marriott as a chain has 1,500 hotels worldwide in 50 countries.

600 of which = 40% are franchisee.

Revenues in 1998 = 10 Billion US Dollars.

Marriott went online in 1995 (Internet-based).

www.marriott.com receives orders worth 3 million US Dollars monthly.

Company intranet for 20,000 employees becoming extranet between all franchisee.



B2B and the supply chain

B2B applications consist of a series of processes and roles that represent the supply chain of a specific product and/or service.

External operations with partners outside the organization are as important as the interaction between the units within the organization.

Rawmaterial

End-userSupply Chain Process



Upstream Activities

Involving material and service inputs

from suppliers

Internal Activities

Involving manufacturing and packaging of goods

Downstream Activities

Involving distribution and sale of products to distributors and

customers

Supply chain divisions



B2B insights

Backbone = Supply Chain ManagementIt represents the coordination or order generation, order taking, and order fulfilment and distribution of products, services and information

Contribution = Customers + SuppliersLower purchase costs

Reduced inventory

Enhanced efficiency of logistics

Increased sales

Lower sales and marketing costs



Selling = electronic marketingSelling = electronic marketing

Purchasing = procurement managementPurchasing = procurement management

Electronic Intermediary = service providerElectronic Intermediary = service provider

Delivery = JITDelivery = JIT

Network Platform = internet/intranet/extranetNetwork Platform = internet/intranet/extranet

Communication Protocol = EDICommunication Protocol = EDI

Back-End IS = ERP systemsBack-End IS = ERP systems

B2B componentsB2B components



Online services to business

Famous online services include:Tourism

Employment placement/job market

Real state

Trading stocks

Cyber banking

Insurance

Auctions



It is important to note that…

There are 2 categories of internet businessesPure play– Businesses having only an online presence

www.amazon.com www.ebay.com

Bricks and clicks– Businesses combining online presence with traditional offline

operations. www.bn.com www.nordstrom.com www.nytimes.com



B2C pure-play business models

Direct sellersMake money by selling products or services to consumers.

IntermediariesFacilitate transactions between buyers and sellers and receive a percentage of the value of each transaction.

Advertising-based modelsHave ad inventory on their site and sell it to interested parties.

Community-based modelsallow users worldwide to interact with one another on the basis of interest areas.

Fee-based modelscharge viewers a subscription fee to view content.



Bricks-and-clicks business model

For some product categories, individuals have to touch, feel, or try on a product before buying.Delivering products is a hassle for dot-coms.Product returns can be tricky.Salespeople can help customers by answering product questions, providing feedback, and suggesting other products.Spin off the online venture.Create a strategic partnership.Create a joint venture between a bricks-and-mortar store and an online company.Integrate the online operation with the existing physical operation by creating a division within the company.



B2B pure-play business models

Business markets are unique in many ways:High value of purchases

Large order size

Items purchased

Purchase specificity

Team buying

Use of buying specialists

Special services required

Team selling

Vendor/value analysis

Leasing

Competitive bidding

Derived demand and cyclical demand

Number and location of buyers




EDI and ExtranetsEDI– Created on a closed network—systems did not speak to one another.

Extranets– An intranet that is adapted so that external parties are provided

varying degrees of access to information.

B2B marketplaces—net marketsBroadly described as all online marketplaces where buyers and sellers congregate to exchange goods and services for money.

Net markets can be organized either horizontally or vertically.




Types of net markets…1. Buy-centric markets are organized by large, influential buyers as

a place where small and fragmented sellers can sell their goods.

2. Sell-centric markets are markets where one or more big sellers build a marketplace for small, fragmented buyers.

3. Neutral exchanges appear when both the sellers and the buyers are fragmented.




Why do use net markets?Selection of buyers or sellers (global markets) is greater.

Dynamic markets may be a great place to move inventory quickly.

Efficient exchange process minimizes employee time.

Prices are low due to expanded access to sellers.

Some one-time deals are available only to online audiences.




Challenges faced by eMarketplaces…Building traffic is a big challenge for eHubs.

Competing eMarketplaces.

Integrating other sales channels with eMarketplaces.



Incorporating the Internet/Web for more effective business

Steps include…1. Business assessment

2. Delivering value to the consumer

3. Define revenue model

4. Implementation



Step #1: Business assessment

Digitality and profit orientationDigitality– The digitality of a business is the proportion of a business that is

online.

Profit orientation– Each company must determine whether its online operation is a

service to consumers or if it will provide income for the organization.



Step #2: Delivering value to the consumer

ValueA consumer’s perception of the consequence of using a product or service in relation to prior expectations.

Steps to deliver value include…1. Identify how different consumers perceive value.

2. Choose which value elements will be delivered.

3. Provide the value—build the business in such a way that it manifests the desired elements.

4. Develop an integrated communications package to help customers learn about the nature of the value.

5. Assess how customers perceive the value being delivered.



Step #2: Delivering value to the consumer

Value drivers in physical versus virtual spaces…Physical space value drivers – the 4 Ps

– Product– Price– Place– Promotion

Virtual space drivers – the Internet toolkit– Commerce– Communication– Cost reduction– Connectivity– Community – Content– Computing



Step #3: Define revenue model

Ways to maximize profits.1. Commerce - Selling products or services to consumers or

businesses.

2. Advertising - Selling advertising space to interested advertisers.

3. Fees - Charging fees to consumers for various services.

4. Sale of consumer information - Aggregating consumer behavior information and selling it to interested companies.

5. Credit - Receiving money from the consumer on day 1 and paying vendors after a long period of time (float).



Step #3: Define revenue model

eBusiness typically have intangible and informational assets.

One of the primary benefits of the Internet is the ease of linkage between firms.



Step #4: Implementation

Internet time

Higher visibility of errors

Lower switching costs

More complex linkages



Step #4: Implementation

Why CRM systems fail?Losing sight of why the CRM system is being implemented.

Not having a clear sponsor who owns the vision.

Underestimating the difficulties of integration.

Why CRM systems succeed?Allocate adequate resources.

Provide incentives for business units to collaborate.

Consider the activities of both online and offline competitors.

Build an Internet culture.

Allow customer input to drive design.

Electronic Business Models

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