Gilbert PefferJAD WorkshopOctober 22, 2002 Business Models Components

2 SimWeb October 22, 2002 – Brussels Determinants of Business Performance Business Model Components and linkages Dynamics Environment Competitive Macro Internet Performance

3 Business Models Components SimWeb October 22, 2002 – Brussels Overview of Internet Properties  Properties of Internet Properties of Internet  Impact of the Internet on the 5-Cs Impact of the Internet on the 5-Cs  Limitation to transactions over the Internet Limitation to transactions over the Internet

4 Business Models Components SimWeb October 22, 2002 – Brussels Properties of Internet  Mediating technology: Internet facilitates exchange relationships among parties distributed in time and space 4 types of interconnection: -B2B: Business-to-business -B2C: Business-to-consumer -C2C: Consumer-to-consumer -C2B: Consumer-to-business  Universality: anybody anywhere in the world can potentially make his products available to anyone else in the world.  Network externalities: the more people connected to Internet, the more valuable it is.

5 Business Models Components SimWeb October 22, 2002 – Brussels Properties of Internet  Distribution channel: Internet allows to distribute music, news, video, software, tickets, and so on.  Time moderator: Internet makes possible to obtain information 24 hours a day.  Information Asymmetry Shrinker: Internet reduces the difference of information available to parties.  Infinite virtual capacity: using the advances to storage and network technologies, customers feel that Internet has infinite capacity to serve them.

6 Business Models Components SimWeb October 22, 2002 – Brussels Properties of Internet  Low cost standard: everybody uses the same protocol. As there is only one standard, costs for users are lower.  Creative destroyer: the low entry costs, flexibility and unlimited possibilities allow entrepreneurs to create new businesses.  Transaction-cost reducer: Internet reduces the costs of searching for sellers and buyers, collecting information on products, negotiating contracts and transportation.

7 Business Models Components SimWeb October 22, 2002 – Brussels Impact of the Internet on the 5-Cs Properties of Internet have a huge impact on the 5 main activities that rest on information exchange: coordination, community, content communication and commerce:  Impact on Coordination Internet reduces the cost of transactions Internet improves product-service features and quality  Impact on Community Internet redefines communities, making them larger and much more valuable Distance and time are no drawbacks to join a community

8 Business Models Components SimWeb October 22, 2002 – Brussels Impact of the Internet on the 5-Cs  Impact on Content Information, entertainment and other products are delivered over the Internet to more people  Impact on Communication People can exchange electronic messages real-time, to many people and with high content Every user has the capacity to broadcast messages

9 Business Models Components SimWeb October 22, 2002 – Brussels Impact of the Internet on the 5-Cs  Impact on Commerce B2B: businesses buy and sell goods and services to and from each other. -Internet provides access to sellers and buyers from all over the world -Internet can create B2B hubs, to provide a central where sellers and buyers can go to find each other B2C: businesses sell to consumers. -Access to e-shops 24 hours a day -Almost no limit to the number of goods an online retailer can display -Firms can collect data and offer personalised service -Some goods can be received instantaneously -When the cost of finding a seller is high, the exchange can involve an intermediary (e.g. Amazon.com) C2C: consumers sell to other consumers. -Usually, this involves an intermediary, such as an action house. C2B: consumers state their price, and firms either take it or leave it. -Usually, intermediaries play an important role

10 Business Models Components SimWeb October 22, 2002 – Brussels Limitations to Transactions over the Internet  Internet cannot transmit tacit knowledge (that is, knowledge uncoded and nonverbalised).  Individuals and organisations are cognitively limited. So, they may not be able to encode their knowledge into a form that can be transmitted over the Internet.

11 Business Models Components SimWeb October 22, 2002 – Brussels Overview of Business Models  Definition Definition  A taxonomy of Business Models A taxonomy of Business Models  Elements of a Business Model Elements of a Business Model

12 Business Models Components SimWeb October 22, 2002 – Brussels Definition An Internet business model is a set of Internet and non-Internet-related activities – planned or evolving – that allows a firm to make money using the Internet and to keep the money coming. An business model should include answers to a number of questions: What value offer to customers? Which costumers to provide the value to? How to price the value? Who to charge for it? What strategies to undertake in providing the value? How to provide the value? How to sustain any advantage from providing the value?

13 Business Models Components SimWeb October 22, 2002 – Brussels A Taxonomy of Business Models  Brokerage: firms act as market makers who bring buyers and sellers together and charge a fee for the transaction they enable. Examples: travel agents, online brokerage firms, online auction houses.  Advertising: the owner of a website provides some content and services that attract visitors, and makes money by charging advertisers fees. Examples: Yahoo, Altavista.  Infomediary model: a firm collects information on consumers and their buying habits and sells it to firms.

14 Business Models Components SimWeb October 22, 2002 – Brussels A Taxonomy of Business Models  Merchant: wholesalers and retailers sell goods and services over the Internet.  Manufacturer: manufacturers try to reach end users directly through the Internet.  Affiliate: a merchant has affiliates whose websites have click-through to the merchant, which pays a fee to the affiliates each time a visitor to an affiliate’s site clicks through to the merchant’s site and buys something.

15 Business Models Components SimWeb October 22, 2002 – Brussels A Taxonomy of Business Models  Community: users have invested in developing relationships with members of their community and are likely to visit the website frequently. Example: iVillage  Subscription: members pay a subscription price and receive high-quality content.  Utility: users pay for the services they consume.

16 Business Models Components SimWeb October 22, 2002 – Brussels Elements of a Business Model  Customer value Customers would buy a product from a firm only if the product offers them something competitors’ product do not. This something can take the form of differentiated or low cost product. Differentiation : a firm can differentiate its products in eight different ways: -Product features -Being the first to introduce it -Ease of access to the products -Service -Product mix -Association with another firm -Brand-name reputation Low cost : products or services cost customers less than those of its competitors

17 Business Models Components SimWeb October 22, 2002 – Brussels Elements of a Business Model  Scope Scope deals with: Market segments or geographic areas to which the value should be offered How many types of products that embody versions of this value should be sold  Revenue sources Determination of the sources of a firm’s revenues and profits. It allows to make better strategic decisions

18 Business Models Components SimWeb October 22, 2002 – Brussels Elements of a Business Model  Price To profit from the value that firms offer customers, they have to price it properly Types of pricing : Menu pricing : sellers sets a price and buyers can take or leave it. One-to-one bargaining : seller negotiates with a buyer to determine at what point the buyer considers the price appropriate for the value he is getting. Auction : seller solicits bids from many buyers and sells to the buyer with the best bid. Reverse auction : sellers decide whether to fulfil the orders of potential buyers. Barter : swap of goofs for goods, or goods for services.

19 Business Models Components SimWeb October 22, 2002 – Brussels Elements of a Business Model  Connected activities A firm must perform the activities that underpin the value (value chain). The activities should be consistent with the value the firm is offering, reinforce each other, take advantage of industry success drivers and make the industry more attractive to the firm. The activities a firm performs are a function of where the technology is in that industry’s life cycle, the technological evolution of the customers and what competitors are doing.

20 Business Models Components SimWeb October 22, 2002 – Brussels Elements of a Business Model  Implementation The way of carrying out the decisions depends on several factors: Structure of a firm. Systems that allow information flow in the shortest time to the right target for decision making. Motivation of employees, and capability of making the right decisions with the available information. Recognizing the potential of an innovation. Organisational culture.

21 Business Models Components SimWeb October 22, 2002 – Brussels Elements of a Business Model  Capabilities Firms need resources to perform the activities Firms need the capacity to turn the resources into customer value and profits: competence. The competitive advantage allows the firm to offer its customers better value than competitors.

22 Business Models Components SimWeb October 22, 2002 – Brussels Elements of a Business Model  Sustainability To sustain a competitive advantage a firm can pursue some subset of three generic strategies: Block strategy : a firm tries to erect barriers around its business model to prevent others from imitating it. Run strategy : a firm must keep innovating its business model. Team-up strategy : a firm can pool others’ resources to strengthen its business model.