Crafting Business Models

Business Model Components In Today’s Network Economy Concept Opportunity Strategy Capabilities Resources needed to execute strategy Value Benefits to all stakeholders What Is It? How Will We? Pg 47

Complete System Revenue Model Cost Model Asset Model Concept Capabilities Revenue Model Cost Model Asset Model Value

Business Model Revenue Options (pages 76-77) Commerce Revenues Product sales Commission, service, or transaction fees Content Revenues Subscription fees Registration or event fees Community Revenues Advertising, slotting, affiliate, and referral fees Membership fees

Revenue, cont. Infrastructure Revenues Software/hardware sales Installation and integration fees Maintenance and updating fees Hosting fees Access fees

Business Model Cost Options (page 77) People and partners Advertising, marketing, sales Business development Materials and supplies Specialized non-IT equipment R&D Physical facilities and infrastructure IT infrastructure

Business Model Asset Options (page 78) Current Assets Financial assets Marketable securities Tangible Assets Property, plant, and equipment Inventory Investments Securities Real estate

Asset Options, cont. Intangible Assets Relationships Strength of online and offline brand Knowledge and expertise Agility and responsiveness Intellectual property Goodwill

Classifying Business Models Value Chain Producer, distributor, consumer In Networked Economy, roles may change Networked Business Models Companies that do business on the Internet and associated networks Companies that provide the networked infrastructure Microsoft fits both

Category 1: Business Built on a Networked Infrastructure Focused Distributor Business Models Much like business model for offline distributors Portal Business Models Serve as gateways offering access to a broad array of content, products, services, solutions through online or multichannel distributions networks Producer Business Models Manufacturer, service provider, educator, advisor, information and news service, producer portal

Focused Distributors Provide products and services to a specific industry or market niche Financial services industry; educational industry; certain echelon of client 5 Types of Focused Distributors: Retailers, Marketplaces, Aggregators, Infomediaries, Exchanges

Model Differentiators Does the business assume control of inventory? Does the business sell online? Is the price set outside the market or is online negotiation and bidding permitted? Is there a physical product or service that must be distributed?

Focused Distributor Model Trends Focused distributors that do not allow customers and the business community to transact business online are losing power. Aggregators are evolving into marketplaces and/or vertical portals. Multiple business models are required to ensure flexibility and sustainability. Focused distributors are aligning closely with vertical and horizontal portals or are evolving their model to become vertical portals.

Portals (doorway/gate) 3 Types Horizontal Vertical Affinity Distinguishing Characteristics Page 54

Distinguishing Characteristics Provide gateway access to a full range of online information and services, including search, calendar, e-mail, instant messaging, chat, and other community-building tools? Provide access to deep content, products, and services within a vertical industry (e.g., financial services, travel) Provide information and services for all types of users or are the information and services specific to a well-defined affiliation group (e.g., women, buying a home)

Horizontal Portals AOL.com, Yahoo! Content, service, research tools Pure-play portals, advertising revenue Hard to sustain Often include multiple vertical solution channels AOL.com both content portal and a network service provider (ISP)

Vertical Portals WebMD Conduct business, learn, shop, communicate, use community-building tools Composed of a variety of business models, all generating revenue/costs Advertising Allow completion of transactions Unique services . . . Subscription revenue

Affinity Portals Deep content, commerce, community features (similar to vertical portal) but targeted to specific market segment

Portal Business Model Trends Horizontal and vertical portals are emerging as dominant sources of power within consumer and business markets. Horizontal portals are joining forces with horizontal infrastructure portals to provide not just access to content and services but also access to network and hosting services.

Portal Trends, cont. Large media and entertainment portals that represent the convergence of data, telephone, television, and radio networks are emerging in the consumer space. Unite content development, packaging, and distribution components of the value chain B2B portals provide both horizontal access to business networks and vertical industrywide solutions.

Producers Design and make and also may directly market, sell, and distribute products, services, and solutions. Producers are assuming positions of power in the Networked Economy by gaining control of distribution channels Online/offline supply or distribution channels to market Vertically integrated megacorporations (AOL Time Warner) uniting producers and distributors within the same firm

Producer Models Manufacturers Service Providers Educators Advisers Information and News Services Producer Portals

Producer Differentiating Factors (pages 57-58) Does the business sell physical products and/or provide face-to-face services? Does the business sell information-based products and/or services? Does the business provide customized products and/or services?

Category 2: Business That Provide Networked Infrastructure Infrastructure Distributor Business Models Infrastructure Portal Business Models Infrastructure Producer Business Models Infrastructure Service Providers

Infrastructure Distributors Enable technology buyers and sellers to transact business 4 Categories Infrastructure retailers Infrastructure marketplaces Infrastructure aggregators Infrastructure exchanges

Differentiating Characteristics (page 61) Does the business assume control of inventory? Does the business sell online? Is the price set outside the market, or is online price negotiation and bidding permitted? Is there a physical product or service that must be distributed?

Infrastructure Distributor Model Trends The speed of obsolescence of the technology, coupled with the complexity of the solution and slim margins, has forced massive consolidation in network and computing technology channels—service revenues driving profitability. Those distributors that take ownership of inventory are searching for inventoryless, JIT business models. Distributors that have the capability for custom configuration of products and services are gaining power.

Infrastructure Portals Provide consumers and/or business with access to a wide range of network, computing and application hosting services. An increasing number of small to midsize and even large organizations are choosing to “rent” rather than lease or buy their digital infrastructure, which is hosted by an infrastructure portal player. 2 Types: Horizontal, Vertical

Differentiating Factors (page 63) Does the firm provide “gateway access” to networks, data centers, or Web services? Does the firm host, operate, and maintain networks, data centers, or Web services? Does the firm provide access to hosted application servers?

Horizontal Infrastructure Portals ISPs (Earthlink) Network Service Providers (AT&T) Data Center Outsourcing Providers (EDS) Web Hosting (Digex) Provides gateway to wide range of services; revenue model includes access and maintenance fees, subscription services, transaction; key costs include data/network operations, software development/maintenance, marketing, sales

Vertical Infrastructure Portals ASPs—Application Service Providers Host and maintain software applications (rather than selling or licensing them), allowing businesses and individuals to log in and conduct business online Operate as a business portal (rather than consumer portal); advertising less significant source of revenue. Revenue from hosting and maintenance, consulting, and integration fees.

Infrastructure Portal Model Trends Horizontal infrastructure portals (ISPs, network service providers, and Web hosting providers) are merging or partnering with horizontal content portals to increase value created through intangible assets, such as information, community, and brand.

Trends, cont. Horizontal content portals such as AOL are vertically integrating with horizontal infrastructure providers such as Time Warner Cable. As Internet advertising revenues fall, horizontal portals such as Yahoo! that do not provide other sources or revenue are evolving their business models to include transaction-oriented and revenue-sharing partnerships with infrastructure portals.

Trends, cont. Aggressive pursuit of a growing market for hosted application services is leading to confusion as players with markedly different business models converge on a common competitive space.

Trends, cont. Two competing vertical infrastructure portal (ASP) models are emerging: Producer-ASPs (Oracle, SAP) provide online access to Internet-enabled versions of their brand-name software Distributor-ASPs (Jamcracker) offer application hosting of many software brands

Infrastructure Producers Design, build, market, and sell technology hardware, software, solutions, and services May sell and provide after-sales service directly or may share this responsibility with online/offline channel partners, including retailers, distributors, and portals 3 types: Equipment/component manufacturers (IBM, Intel), software firms (SAP, Microsoft), custom software and integration services providers (Accenture)

Differentiating Factors (page 64) Does the business manufacture computer or network components or equipment? Does the business develop packaged software? Does the business provide infrastructure services or consulting?

Infrastructure Service Providers Provide online/offline services to support logistics, marketing, and other shared services Federal Express, Agency.com Revenue: subscription fees, service fees, transaction fees Cost: physical infrastructure and skills staff

Business Model Evolution Networked business are built by combining a variety of business models that are then linked with others across multiple value chain networks 4 Approaches to Business Model Evolution (Figure 2.4, pg. 66)

American Express Example Product/Service Enhancement Online travel service (AXI Travel)—decreased booking costs by almost 50 percent Streamlining the process E-booking process Product/Service Category Expansion Leverage the infrastructure and capabilities Expense management Purchasing solution for procurement

Am Exp, cont. Business Model Extension Corporate customers requested a “gateway” for accessing travel, expense, and purchasing services and reports MarketMile, a joint venture with Ventro Corp to provide companies online procurement solutions Results of Model Growth: In Feb 2002 IBM and MarketMile announced an alliance (E-Business on Demand) to help customers reap benefits of e-procurement and manage indirect expense spending via the Internet

Amazon.com Example Product/Service Enhancement 1-click shopping (later patented), wish lists, greeting cards Product/Service Category Expansion From books to DVD/video, superstore—books, music, videos, home furnishings Business Model Extension Two online auctions (low- and high-end) and online marketplace (zShops) Equity partnerships—Drugstore.com (health/beauty), Della.com (wedding registry), Greenlight.com (autos)

Amazon.com, cont Evolution Alliances faultered—home living store ended Extended model in 2000 with strategic alliance with ToysRus.com With this move Amazon adopted both marketplace and ASP business models ToysRus agreed to identify, buy, and manage inventory Amazon handled site development, order fulfillment, and customer service Global expansion of the arrangement Similar partnerships signed with AT&T Wireless, Borders, Circuit City, Target Includes sale of digitally downloadable products

Approach to Analyzing Business Models Profile current business models Revenue/cost models; determine strengths, weaknesses and opportunities Determine how to evolve current model and/or identify new models to pursue Evaluate models of suppliers, customers, partners, competitors (REMEMBER content of “What is Strategy?” article) Prioritize new models and initiatives Opportunity, capabilities and resources, value return

Evaluating Current and Evolving Business Models What business model(s) is your organization using today? Does the business infrastructure enable you to evolve your business model to increase revenue generated per customer and to respond quickly to opportunities and threats? Do you have capabilities and resources for today and the future? Build? Acquire to reduce gaps? Are you delivering benefits to all stakeholders? Are benefits stated and communicated objectively and able to be measured?