Business Models and Strategies Underlying the World of E-Commerce

1. Business Models and Strategies Underlying the World of E-Commerce Dr. Bert Rosenbloom Rauth Chair in Electronic Commerce Management and Executive Director of the Safeguard Scientifics Center for Electronic Commerce Management Drexel University

2. Electronic Commerce Management (ECM) is the emerging business discipline that deals with the strategic, managerial, and operational issues associated with the technology of electronic commerce.

3. The dramatic growth of electronic commerce has begun to raise issues that transcend the technologies that have spawned it.

4. Examples • New business opportunities emerging for E-commerce. • Changing customer relationships from E-commerce. • Developing global strategic alliances among electronically linked firms. • Managing vast networks of suppliers, customers, and intermediaries linked via E-commerce. • Impact of E-commerce on organizational culture. • Electronic commerce and government regulations, especially tax implications. • Education and training of the human resources needed for E-commerce. • Others --- to be discerned in the future.

5. Conventional business models and strategies may not be adequate for planning, organizing, and controlling organizations operating in the new environment of electronic commerce.

6. New business models may be needed to operate successfully in the world of E-commerce No shortage of new E-commerce models has already emerged. Some of which are discussed here.

7. Ground Rules for Examining Forthcoming E-Commerce Business Models • Mostly just theories or hypotheses at this point • Nobody knows yet whether any of them are “right” or “wrong” • Most “evidence” is anecdotal • Experience base is very short -- a couple of years at most • Rigorous empirical evidence in support or non-support of the models is lacking

8. Disintermediation Model Elimination of Middlemen in Distribution Channels Intermediaries become superfluous because producers gain exposure to vast numbers of customers in Cyberspace All that’s needed is a Wesite Millions of customers have access to thousands of producers via the Internet. So, who needs middlemen • Dell Computer $14 million per day

9. Reintermediation ModelAddition of Middlemen in Distribution ChannelSpecialized intermediaries are needed to efficiently link buyers and sellers together in Cyberspace • Amazon .com • Autobytel • Peapod Inc. • Priceline.com • Verticalnet

10. Average Total Cost Model: Conventional vs. Internet Distribution Channels $ Per Unit of Product Sold Conventional Channel ATC C1 0 Q1 Units of Products Sold $ Per Unit of Product Sold Internet Channel C1 ATC 0 Q1 Units of Products Sold

11. Profit After Break-Even Point Model: Conventional vs. Internet Distribution Channels BE Point BE Point Conventional Model TR $ Costs & Revenues Profit TC Loss FC Sales (units) Internet Model TR $ Costs & Revenues Profit TC Loss FC Sales (units)

12. Marketing Channel Flows ModelFive Flows in Marketing Channels • 1. Product flow • 2. Negotiation flow • 3. Ownership flow • 4. Information flow • 5. Promotion flow • Internet superb at handling 2,3,4, and 5 because these can be digitized and moved at speed of light.. • Product flow cannot be digitized and is processed (often by humans) and moves at best at speed of sound. • Product flow may be the Achilles' Heel of E-commerce.

13. Profits Can Wait Model • Why? • Because in the world of E-commerce, if the firm has earned a profit “too soon” it is probably spending too little to stake its claim by establishing infrastructure and customer recognition as a destination Internet player

14. Get on the Internet First Model It’s not important to have a perfected or even a carefully considered business concept or plan to operate on the Net. The same goes for offering an IPO. What is important is to be first because the first is the one customers remember.

15. Brand Equity is Key ModelBrand equity has shifted from product namesin the conventional world to the names of Internet firms in the E-commerce world • Amazon.com • Ebay • Yahoo • AOL • Priceline.com • “Everybody knows them and everybody goes there.” • Brand equity has evolved into “channel equity” • on the Internet.

16. Market Cap is All That Matters ModelWho cares about sales, earnings, real assets and people. The only thing that matters is the size of your market

17. Lifetime Value of Customer Model • How much revenue and/or profit will a customer generate over the course of a lifetime of doing business with you • Old concept----- not new to E-commerce • What is new is the use of LVC by Internet firms to justify • Lack of profits • Huge market caps • Current users X projected growth X revenue produced by each over their lifetimes= • A Whole Bunch

18. 100 million customers in market Perfect Market Aggregation (1 product) Perfect Market Segmentation (100 million different products) Perfect Market Segmentation Model Market segment Niche marketing Micro-marketing One -to-one marketing Relationship building Technological capabilities provided by the Internet enable firms to approach the state of perfect market segmentation.

19. It’s Your Marketing Channels Stupid Model • Marketing Mix Strategic Variables (4Ps) • Product Strategy • Pricing Strategy • Promotional Strategy • Place (channel) Strategy • Sustainable competitive advantage too difficult to achieve with first three Ps • Internet provides a new frontier for creating a “sustainable competitive advantage” through the fourth P, channel strategy.

20. Optimum Customer Service ModelCustomer tracking and profiling capabilities via the Internet provides near perfect information about customer purchasing and usage patterns. • Therefore • Heavy buyers get heavy service and • Light buyers get light service. • Heavy service demand customers who • don’t spend much get cut off. • Just ask Fidelity Investments

21. Channel Conflict Model • In the world of E-commerce, new start-ups have a huge advantage over firms with established conventional marketing channels because they can avoid channel conflict. • Conventional channels of existing companies become “baggage” when they attempt to sell via the Internet. The poster child is: • Compaq Computer

22. Convenience and Efficiency Model • Business to Consumer Market • E-commerce via the Internet must grow spectacularly because consumers want convenience and Internet shopping provides the ultimate in convenience. • Caveat • How about behavioral motives for shopping. • Business to Business Market • E-commerce via the Internet will be virtually the only way • businesses deal with each other because of the cost effectiveness and efficiency of the technology. • Caveat • Non-rational motives also exist in the B-to-B market.

23. Variable Cost Pricing ModelWe lose $50 on each room but we’ll make it up in volume. • Silly or possible • Answer: possible • As long as excess capacity exists and price charged is above variable unit costs. • Regular price of hotel room $180 • Occupancy rate 60% • Average Fixed Cost $100 • Average Variable Cost 40 • Average Total Cost $140. • Hotel offers half price on rooms $90 • Less : AVC 40 • Contribution to FC $50 Internet is a near perfect source for this type of information Maybe Priceline.com has a bright future!

24. Technological Equality Model • Internet technology in E-commerce becomes virtually equal among firms. • Like air conditioning and elevators, everybody has them and is expected to have them. • Therefore: • Technology no longer offers any given firm a differential advantage • Playing field becomes “technologically level” and so firms’ quest for “sustainable competitive advantage” reverts back to “old fashioned” strategy. • For related discussion see: Michael Porter, “What is Strategy?” Harvard Business Review. (Nov-Dec. l996).

25. Internet is a Whole New Culture ModelUnless you are: • Under 25 • Have virtually no experience • Untainted by having worked at a conventional company • Guaranteed substantial stock options • Convinced you are a master of the Web universe • You are not suitable to work for, provide consulting to, or even mix socially with the Internet elite.