Crafting the Network Economy Business Model Some of the best innovations involve a paradigm shift, a real mental change of assumptions and certainties. In fact, the process of innovating and entrepreneuring is much less about invention or new ideas. It’s much more about rethinking and questioning the assumptions people already make… The ability to rethink fundamental assumptions and take what people accept as certain and question it [is the central] talent of being an entrepreneur. Scott Cook, Founder of Intuit Inc. If there is one lesson we can learn from continuing evolution of work and competition in the new economy, it’s this … Change the question and you change the game… Slywotsky and Morrison, Profit patterns (NY Times Business, 1999)

Crafting the Network Economy Business Model Old economy question What business am I in? New network economy question What is my business model? Emerging networked technology enable us to create new business model and redefine existing ones. IT can provide flexible channel for procuring and distributing products and services As well as the tools to create and package content in all its many forms Data, voice, video

Crafting the Network Economy Business Model Concept describes the opportunity and strategy Value Measures the benefits to investors and other stakeholders Capabilities define resources needed to execute strategy

Crafting the Network Economy Business Model

Classifying the Business Models Producers Design and build products and services that customer or market needs May sell, service, and support the product Distributors Enable buyers and sellers to connect, communicate, and transact business. May assume control of inventory and resell a product, solution or service (retailers, wholesalers). May simply act as agents, connecting buyers and suppliers but no assuming control of inventory (aggregators, marketplaces, and exchanges).

Classifying the Business Models

Classifying the Business Models Business Built on Networked Infrastructure Focused distributors Portals Producers Business That provide networked Infrastructure Infrastructure distributor Infrastructure Portals Infrastructure Producers

Business Built on a Networked Infrastructure Focus Distributor Provide products and services related to a specific industry or market niche E.g. InsWeb and E-Loan as focused distributors offering products and services within the financial services industry. Staples.com was a focused distributor for office products and suppliers.

Classifying the Business Models Five type of focused distributors business model Retailer Marketplace Aggregator Exchange Infomediaries

Classifying the Business Models These five types can differentiated by asking the following questions 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?

Classifying the Business Models Focus Distributors: Retailers E.g. ToysRus and Staples.com Assume control of inventory, set a nonnegotiable price to the consumer, and sell physical products online. The primary revenue model is based on product/service sales, The cost model includes procurement, inventory management, order fulfillment, and customer service.

Classifying the Business Models Focus Distributors: Marketplaces E.g. E-Loan and InsWeb Sell products and services but do not take control of the physical inventory. Sell products with a nonnegotiable price and complete sales online. The revenue model is based on a commission or transaction fee for sale. Usually e-link to supplier databases and transaction systems to ensure that transactions can be completed and revenue can be recognized.

Classifying the Business Models Focus Distributors: Aggregators E.g. Autoweb Provide information on products or services for sale by others in the channel. Allow a comparison of features and pricing but do not enable buyers and sellers to complete the final transaction The revenue model is based on referral fees and advertising

Classifying the Business Models Focus Distributors: Infomediaries Internet Securities Special type of aggregators that unites sellers and buyers of information-based products, such as news, weather, sports, and financial information. Transaction can be completed online because no physical product is involved Revenue model include subscription fee, advertising

Classifying the Business Models Focus Distributors: Exchanges eBay and FreeMarket May or may not take control of inventory May not complete the final sales transaction online The key differentiating feature of this model is that the price is not set; it is negotiated by the buyer and the seller at the time of the sale. The revenue, cost, and asset models vary depending on weather the online exchange assumes control of inventory and completes the transaction. B2B auction exchanges such as FreeMarket charge transaction fees and supplement revenues with fees for consulting services. B2C and C2C exchanges often supplement transactions revenues with advertising revenues

Focused Distributor Business Models Models and Examples Own Inventory Sell Online Price set Online Physical product or service Likely Revenues Likely costs Retailer ToysRus.com Staples.com Yes No Product/service sales Advertising and marketing; physical facilities; inventory and customer services; R&D; IT infrastructure Marketplace Eloan.com nsweb.com Possible Transaction fees; service fees; commissions Advertising and marketing; R&D; IT infrastructure Aggregator Internet Securities Possibly Referral fees; advertising and marketing fees Exchange ebay.com freemarket.com Depends on model Advertising and marketing; staff support for auctions (especially B2B)R&D; IT infrastructure; inventory control; R&D; technical infrastructure.

Focused Distributor Business Models Trends Focused distributors that do not allow customers and 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 flexible and sustainability Focused distributors are aligning closely with vertical and horizontal portals or are evolving their model to become vertical portals

Classifying the Business Models Portals “Door way” Early Pre-Internet Portals American Hospital Supply’s ASAP AA Sabre Online consumer portals America Online CompuServe

Classifying the Business Models Types of Portals Horizontal Vertical Affinity

Classifying the Business Models The different types of portal can be differentiated by: Does the business 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 Does the business provide access to deep content, products, and services within a vertical industry (e.g. financial services, travel, etc.) Does the business provide information and services for all types of users, or are information and services specific to a well-defined affiliation group (e.g. women, people selling or buying a home)

Classifying the Business Models Horizontal Portals Aol.com , Yahoo and Quicken.com Provide gateway access to the Internet’s vast store of content and services. Provide a broad range of tools for locating information and websites, communicating with others, and developing online communities of interest. Revenue models Advertising Transaction fee from multiple vertical solutions channels. Strategic alliances with dial-up and broadband Internet service providers (ISP) Cost includes development, maintenance, and operation of infrastructure and content

Classifying the Business Models Vertical Portals E.g. Covisint and WebMD Provide deep content: a place to conduct business, learn, and shop; communicates and community-building tools Often composed of a variety of business models, all of which generate separate revenue streams. Advertising and referral fees if transactions are not completed online Service fees and transaction fees may be generated if transactions are completed online Subscription fees may also be generated for unique content

Classifying the Business Models Affinity Portals iVillage.com and Realtor.com Provide deep content, commerce, and community features such as those found in vertical portal but these offerings are targeted toward a specific market segment. Some towards a specific gender The revenue model is similar to vertical portals, cost, and asset models are based on business model adopted by the portal

Deep Content and Solutions Portal Business Models Models and Examples Gateway Access Deep Content and Solutions Affinity Group Focus Likely Revenues Likely costs Horizontal Portal AOL.com Yahoo.com Quicken.com Small business Yes Possibly; often through partnership with vertical and affinity portals Possibly; often partnerships Advertising, affiliations and slotting fees; possibly subscription or access fees Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure Vertical Portal WebMD.com Covisint.com Limited No Transaction fees; commissions; advertising, affiliation and slotting fees Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure; legacy system integration to support transactions Affinity Portals Realtor.com iVillage.com Possibly Focused on affinity group Referral fees; advertising and slotting fees Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure

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 Large media and entertainment portals that represent the convergence of data, telephone, television, and radio networks are emerging in the consumer space. These portals unite content development, packaging, and distribution components of the value chain B2B portals provide both horizontal access to business networks and vertical industry-wide solutions

Classifying the Business Models Producers Producers design and make also may directly market, sell, and distribute products, services, and solutions. Producers held the position of power in the traditional business market In contrast, the Internet and associated networked technologies of the Network Economy create wealth by connecting buyers and suppliers. Many believed that distributors would become the dominant players in the Network Economy. Gaining control of the distribution channel is a key success factor in the today Producers are also thinking of taking steps to recapture the position of power by forming coalitions with distributors Covisint in the automobile industry and Global Healthcare Exchange in the health-care industry.

Classifying the Business Models Six categories of producers business model Manufacturer Service provider Educator Adviser Information and new service Producer portal

Classifying the Business Models Differentiating between producers 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

Producer Business Model Manufacturer Ford Motor Company and Procter & Gamble Design, produce and distribute physical products, components and parts The Internet and associated networked technologies has been used to streamline, integrate, coordinate, and control physical channels of production and distribution. Often these IT-enabled process redesign efforts often begin inside the organization and extend to connect customers, suppliers, and partners.

Producer Business Model Service Providers American Express and Singapore Airlines Offer a wide range of services offerings that may be delivered through multiple channels. Like manufactures of physical producer, service providers that offers physical services (e.g. car rental agencies, restaurants, etc.) often use it to streamline, integrate, coordinate, and control service delivery and to connect and share information with customers, suppliers, and partners. Service providers that offers primarily information-based services (e.g. financial services) can use IT to digitize service delivery.

Producer Business Model Educator DePaul, Harvard, and Virtual Universities Create and deliver online educational programs, products, and services. The ability to use the Internet and associate technologies to define new multimedia educational offerings and to customize those offerings to meet of individual and businesses is revolutionizing education. Distance will never replace face-to-face class room education offerings.

Producer Business Model Advisers McKinsey and Accenture Consulting and coaching services to business and individuals. Use online to extend the nature of the relationship with customers from a one-time consulting project to an ongoing education and advisory service. Online channels can used to disseminate knowledge, connect consultants with their clients, and create communities of interest.

Producer Business Model Information and News Services Dow Jones and Euromoney Create packages and deliver information through both online and offline channels and across multiple media formats Because information in all its many forms can be digitized, stored, and delivered to meet personalized needs, we convergence among polishing, television, radio, and information industries.

Producer Business Model Producer Portal Covisint and Global Healthcare Exchange Use the Internet and associated technologies to support all aspects of the production and distribution process

Portal Business Models Models and Examples Sale Physical Product/ Services Sale Information-based Product/ Services Level of customization Likely Revenues Likely costs Manufacturers Ford Motor Company Procter & Gamble Yes Possibly Low to moderate Product sales; services Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure Service Providers American Express Singapore Airlines Moderate to high Commissions, service, or transaction fees Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure Educator DePaul.edu Harvard.edu Registration or event fee; subscription fee; hosting fee Content/information asset management; R&D; IT infrastructure

Portal Business Models Model differentiators Models and Examples Sale Physical Product/ Services Sale Information-based Product/ Services Level of customization Likely Revenues Likely costs Information and news Services Dow Jones Euromoney Yes Moderate to high Subscription fee; transaction fee; or service fee Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure Producer Portal Covisint Global Healthcare Exchange Possibly High Service or transaction fee; membership fee; Consulting and integration fee; hosting fee Content/information asset management; R&D; IT infrastructure; software development logistics

Producer Business Model Trends Producers must be best in class – the number one or two brand – to survive Some large full-service producers, such as American Express and Citigroup in the financial services industry and AOL Time Warner in the entertainment and media industry, are acquiring a full range of products and services and then integrating them to provide vertical solutions required by customers. This solutions are offered through company-owned portals and also through a wide variety of distribution agreements. Industry supplier coalitions are forming to enable virtually integrated B2B commerce within and across industry groups

Businesses that Provide Networked Infrastructure Until recently, there was a distinct separation between businesses that were built using IT and those developing and selling IT. “Charles Schwab is a technology company that just happens to be in the brokerage business. Everything we think about as we run our business has technology in the center of it with the goal of engineering cost down and service up…” David Pottruck co-CEO of Charles Schwab