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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.

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Business models and strategies underlying the world of e commerce

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


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.


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


Examples
Examples raise issues that

  • 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.


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


New business models may be needed to operate successfully in the world of e commerce

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.


Ground rules for examining forthcoming e commerce business models
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


Disintermediation model
Disintermediation Model Models

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


Reintermediation Model ModelsAddition 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


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


Profit After Break-Even Point Model: Distribution Channels

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)


Marketing channel flows model five flows in marketing channels
Marketing Channel Flows Model Distribution ChannelsFive 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.


Profits can wait model
Profits Can Wait Model Distribution Channels

  • 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


Get on the internet first model

Get on the Internet First Model Distribution Channels

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.


Brand Equity is Key Model Distribution ChannelsBrand 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.


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


Lifetime value of customer model
Lifetime Value of Customer Model Distribution Channels

  • 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


Perfect market segmentation model

100 million customers Distribution Channels

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.


It s your marketing channels stupid model
It’s Your Marketing Channels Distribution ChannelsStupid 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.


Optimum Customer Service Model Distribution ChannelsCustomer 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


Channel conflict model
Channel Conflict Model Distribution Channels

  • 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


Convenience and efficiency model
Convenience and Efficiency Model Distribution Channels

  • 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.


Variable cost pricing model we lose 50 on each room but we ll make it up in volume
Variable Cost Pricing Model Distribution ChannelsWe 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!


Technological equality model
Technological Equality Model Distribution Channels

  • 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).


Internet is a whole new culture model unless you are
Internet is a Whole New Culture Model Distribution ChannelsUnless 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.


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