Chapter 2 Adopting appropriate e-business models

2 Learning objectives What constitutes a business model Why understanding and articulating a business model is vital to an organisation achieving profitability and sustainability The essential components of a business model, and some generic business models

3 Learning objectives How managers can use business models and the implications of business models for managerial decision making and action taking The relationship between business models and organisational strategy

4 Introduction Internet (& associated technologies) form foundation of global communication & information infrastructure transforming industries & changing way business is conducted need to investigate new models of business that effectively utilize potentiality of Internet & associated technologies “ gold rush ” mentality of mid-late 1990s serious search for frameworks/models to analyze & define e-commerce landscape

5 What is a business model? A business model is a description of how a business works its value chain, process interactions, cost structure, and revenue sources, how it will achieve profitability and sustainability. BUT the term ‘business model’ is becoming a buzzword, and thus routinely misappropriated

6 What is a business model? Why focus on business models? traditional, industrial age concept of how business was conducted is very clear We understand: * how business is structured * types of people/skills needed * roles filled * how business makes money * how business delivers value to customers, suppliers, partners, owners I work for an insurance company. I sell cars.

7 Internet “disrupts” our understanding & presents new possibilities/potentialities new (additional) channel for procuring & distributing goods & services highly interactive with new capabilities What is a business model?

8 new business models needed to shape business practices in new business environment Value proposition (value delivered to customers), capabilities, sources of costs & revenues are generally less familiar & obvious, & therefore need further analysis & articulation

9 What is a business model? Business models defined … “ an operating business model is the organisation ’ s core logic for creating value … since organisations compete for customers & resources, a good business model highlights the distinctive activities and approaches that enable the firm to succeed – to attract customers, employees, and investors, and to deliver goods & services profitably. ” (Linder & Cantrell 2000:2)

10 What is a business model? Business Model defined… “ a business model is nothing else than the architecture of a form and its network of partners for creating, marketing and delivering value & relationship capital to one or several segments of customers, in order to generate profitable and sustainable revenue streams ” (Dubosson-Torbay et al. 2002:7)

11 What is a business model? Function of Business Models Articulate value proposition Value created for customers by goods/services (via use of technology) Identify market segment Define structure of internal value chain required to create & dist8ribute offering

12 What is a business model? Function of Business Models Consider cost structure and profit potential, given value proposition and value chain structure Describe position of firm within value network Formulate competitive strategy

13 What is a business model?

14 Customer management Embraces a number of aspects associated with customers & relationships that organisation maintains with customers Customer identification Which customer segment(s) do we serve? Are our customers organisations or end consumers?

15 Customer management Value proposition Defines & describes the value an organisation delivers to its customers Stems from perceptions of customers as to what is important Understanding & servicing customer requirements Developing brand awareness

16 Product & service portfolio What portfolio of products and/or services and/or experiences does an organisation offer its customers? Broad or narrow range? Stand-alone or tightly integrated? Where on the product lifecycle are an organiZation’s products, services and experiences?

17 Product & service portfolio

18 Product Portfolios

19 Processes & activities What core business processes and activities does an organisation require in order to deliver the value proposition to its customers? How should a business be configured? Do these processes and activities imply a need to develop external linkages to ensure delivery of value proposition, or can/should they be performed internally?

20 Resources, capabilities & assets What resources, capabilities, assets do we need to deliver value proposition? In-house or outsource? How do we recruit & train human resources needed for success?

21 Suppliers & Business Networks

22 Suppliers and Business Networks Do we need close relationships with other organisations in order to deliver the value proposition to customers? How to find & manage the resultant strategic business network (SBN)? Will SBN enhance our ability to be responsive, flexible, agile in changing & competitive environment?

23 Financial Viability Profitability & sustainability Incoming revenues must exceed costs over time Typically costs are incurred before revenues are received Challenge is to manage cash flows to ensure sustainability

24 Financial Viability Sources of revenues? Selling goods, services Selling advertising space, sponsorship Commissions, subscription fees When will revenues be generated? How moneys apportioned across SBN?

25 Costs Identify total costs (all costs associated with design, developments and/or procurement of goods & services, and all costs incurred in delivering on value proposition of customers) Where are costs incurred? Understanding costs is essential to establishing pricing mechanisms & policies Financial Viability

26 Financial Viability Risk considerations What assumptions are being made about revenues streams, costs, sales volumes? With what degree of uncertainty?

27 Established price customers are willing to pay? When are goods / services expected to be profitable? Have all costs been identified? All revenues? Opportunities to leverage knowledge, technology or physical assets? Has risk been considered? Financial Viability

28 Examples of business models Importance of business models A good business model does not guarantee success Must be implemented via appropriate strategies & effectively managed Provides a coherent framework for managers to think about elements of business & to avoid overlooking elements critical to success Given 6 elements, there are many ways of combining these to form organisational blueprints

29 Examples of business models Direct-to-Customer model Basis of commercial transactions over the Internet Describes process of selling direct to customer via organisational website Incorporates both supply-oriented transactions (organisation is in role of buyer) & demand- oriented transactions (organisation is in role of seller)

30 Place, and/or space Communicate directly * individual * business * wholesaler (Ingram books) * retailer (Wal-Mart) * producer (Gillete, Nike) SB Examples of business models Direct-to-Customer model

31 Direct-to-Customer model Customer management Does moving online increase potential market, or does it cannibalise existing market? Does online service increase satisfaction & loyalty? What is the customer value proposition? How is it enhanced or supported through moving online? Product & service portfolio Are an organisation’s goods & services suited to selling online? Examples of business models

32 Direct-to-Customer model Processes & activities Need for excellent order fulfilment & delivery Are new processes & activities implied by the move online? Is there a risk of channel conflict as a result of moving online? Resources, capabilities, assets Required IT capabilities? Warehousing, logistics capabilities for online trading? Examples of business models

33 Direct-to-Customer model Suppliers & business networks Alliances needed with external providers of components of the value proposition? Skills needed to form and manage relationships? Financial viability Sources of revenue (online sales, selling advertising space, referrals?) Sufficient financial resources for investments in IT & systems integration? Examples of business models

34 Intermediary model An intermediary serves to mediate transaction between buyer(s) and seller(s) Role of intermediary varies according to circumstances Examples of business models

35 Communicate indirectly * individual * business SB Examples of business models I * individual * business Intermediaries: *broker / infomediary *auction *portal *B2B marketplaces B B S S Intermediary model

36 Intermediary model Types of intermediaries Broker or infomediary Auctions Portals Marketplaces or hubs Examples of business models

37 Intermediary model Customer management Understanding range of services required of intermediary & valued by customers is essential to success Recognise potential for conflict between desires of buyers and needs of sellers Product & service portfolio Intermediary model often involves services only ‘value’ attached to services must be capable of generating a stable source of revenue Examples of business models

38 Intermediary model Processes & activities Need for excellence in gathering and managing information & knowledge (about buyers & sellers requirements, about industry, about range of products & services, etc) Excellence in integrating processes of buyers and sellers required Resources, capabilities, assets May be providing infrastructure to trading parties Must be structured to allow intermediary to retain control of transactions May require integration across organisational boundaries Examples of business models

39 Intermediary model Suppliers & business networks May require extensive use of business networks & alliances (e.g. portals) Need to make decisions about which services provided internally as opposed to external providers Financial viability Revenue streams from transaction fees, subscription fees, provision of online content, advertising Major costs stem from building robust infrastructure & marketing Must achieve critical mass of buyers and sellers to ensure transaction volume and future viability Examples of business models

40 Examples of business models Content Provider model provides content based on expertise, on-sold to third parties, or made available free of charge (e.g. weather forecasts, news) Revenues generated through sales of content, or through selling advertising space on popular sites often a variant of Direct-to-Customer model

41 Implications for managers Simple framework of business models helpful for enhancing understanding and dialogue among managers Serves to align organisational members to organisational mission

42 Implications for managers Sound, coherent, articulated business model essential for any business Must be complemented by strategy that takes into account competition, industry forces & the like Business model defines what an organisation is all about, what is does, how it makes money Strategy articulates how it will achieve goals and targets

43 Implications for managers But … Different researchers & writers do not always approach the concept of a business model in a similar way … Consider the views of: Harvard Business School (Applegate) Aust. Graduate School of Management (Weill & Vitale) Gartner group (Taylor & Terhune) Eisenmann (Harvard – 2002)