Business Models How do information systems change the structure and operation of the enterprise Copyright © 2016 Curt Hill

Introduction How do information systems support business models? What is a business model? Copyright © 2016 Curt Hill

Business Models A business model should show the following: What does the enterprise do? How does a it do this? In what ways does the company get paid for doing this? What are the key resources and activities needed? What are the costs involved? Copyright © 2016 Curt Hill

Application Lets consider these questions briefly for two widely different enterprises –Amazon –VCSU We can back up one screen to consider Copyright © 2016 Curt Hill

Some Additional Questions What industry? How competitive it is in that industry? What, if any, competitive advantage does the company enjoy? How profitable is the company? –How profitable can it be? Copyright © 2016 Curt Hill

Once more A business model is a summary of a business’s strategic direction that outlines how the objectives will be achieved A business model specifies the value proposition –How a company will create, deliver, and capture value. –Each component plays a role in shaping all aspects of the business Copyright © 2016 Curt Hill

Components There are many things that contribute to the business model –Some discussed here What customers are targeted? What product or service for them? How do we get the product to the customer? How long and how strong are the relationships we form with our customers? –How create and maintain these Copyright © 2016 Curt Hill

Components Again What resources do we need? What activities do we need to do? What other enterprises do we have in this? –Partners and suppliers What are the costs to do the things on this page? Copyright © 2016 Curt Hill

Revenue Models The most important ingredient for any organization is determining how to generate revenue A revenue model describes how the firm will earn revenue, generate profits, and produce return on investment This is often different in the digital world than it used to be Copyright © 2016 Curt Hill

Income Streams Sales –Traditional for tangible products Commission –From brokering a transaction Advertising –We sell advertising on our web site or in our products Licensing –Product is not sold but licensed –Users are usually unable to resell –Most often for software Copyright © 2016 Curt Hill

More Income Affiliate Marketing –We refer customers to a business –Get a percent or fixed fee Subscription –Usually a service provided while subscription is paid Copyright © 2016 Curt Hill

Freeconomics Giving a product for free, yet still able to make a profit –Free may still allow profit The old adage is that if you are not paying for the product, then you are the product Lets consider Google Copyright © 2016 Curt Hill

Google Google gives away search Users give Google search results their attention –This can include attention to sponsored links –Google sells space for sponsored links Advertisers pay Google for that attention to sponsored links –Some users convert into customers –Customers pay for advertised products Works nice at scale Copyright © 2016 Curt Hill

International Strategies The cost of shipping and communication has dropped so much that more companies are going international How is this done? Four strategies –Home replication –Global –Multidomestic –Transnational What are the pros and cons? Copyright © 2016 Curt Hill

Home replication Seek our markets similar to local –International business seen as extension of home business Pro: Focus on core market strengths Con: Cannot react to local conditions The foreign company is just copy of domestic –Limited communication –Local databases Copyright © 2016 Curt Hill

Global Central organization, standardized offerings across all markets –Homogenous markets Pro: Economies of scale Con: Difficult to react to local conditions Only one company with centralized systems, networks and data sharing between home office and subsidiaries Copyright © 2016 Curt Hill

Multidomestic The foreign company is not a copy –It is customized to its environment Pro: Quick reaction to changing local conditions Con: Differing products prevents economies of scale –Limited communication and knowledge sharing A federation of cooperating systems –Bidirectional communications with local databases Copyright © 2016 Curt Hill

Transnational Both centralized and decentralized components, integrated network and market Benefits of both multi-domestic and global strategies Highly complex, difficult to manage Distributed/shared systems, enterprise-wide linkages, common global data resources Copyright © 2016 Curt Hill

Conclusions The world has changed The way business was done a hundred years ago may not work anymore A sea change of different business models is now apparent Copyright © 2016 Curt Hill

History Speaks F. W. Woolworth’s Great Five Cent Store started in 1879 The largest department store chain in the world in 1979 Restructured in 1993 –Closed 800 stores Rest were closed in 1997 Footlocker most successful of the owned chains

What Happened? What caused the demise of Woolworth’s? –I do not know What has changed from their glory days? Several things have made the business environment much faster –IT –Telecommunications Modern enterprises need to be agile –Quick on their feet and able to change