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Chapter 2 Adopting appropriate e-business models Learning objectives What constitutes a business model Why understanding and articulating a business model is vital to an organisation achieving profitability and sustainability

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learning objectives
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
learning objectives3
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
introduction
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
what is a business model
What is a business model?
  • A business modelis 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

what is a business model6
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 sell cars.

I work for an insurance

company.

what is a business model7
What is a business model?
  • 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 model8
What is a business model?
  • 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
what is a business model9
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)

what is a business model10
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)

what is a business model11
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
what is a business model12
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
customer management
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?
customer management15
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
product service portfolio
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?
processes activities
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?
resources capabilities assets
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?
suppliers and business networks
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?
financial viability
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
financial viability24
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?
financial viability25
Financial Viability
  • 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 viability26
Financial Viability
  • Risk considerations
    • What assumptions are being made about revenues streams, costs, sales volumes? With what degree of uncertainty?
financial viability27
Financial Viability
  • 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?
examples of business models
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
examples of business models29
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)
examples of business models30
Examples of business models

Direct-to-Customer model

Place, and/or space

S

B

Communicate directly

* wholesaler (Ingram books)

* retailer (Wal-Mart)

* producer (Gillete, Nike)

* individual

* business

examples of business models31
Examples of business models
  • 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 models32
Examples of business models
  • 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 models33
Examples of business models
  • 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 models34
Examples of business models
  • Intermediary model
    • An intermediary serves to mediate transaction between buyer(s) and seller(s)
    • Role of intermediary varies according to circumstances
examples of business models35
Examples of business models

Intermediary model

S

B

Communicate indirectly

S

B

I

B

S

Intermediaries:

*broker / infomediary

*auction

*portal

*B2B marketplaces

* individual

* business

* individual

* business

examples of business models36
Examples of business models
  • Intermediary model
    • Types of intermediaries
      • Broker or infomediary
      • Auctions
      • Portals
      • Marketplaces or hubs
examples of business models37
Examples of business models
  • 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 models38
Examples of business models
  • 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 models39
Examples of business models
  • 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 models40
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
implications for managers
Implications for managers
  • Simple framework of business models helpful for enhancing understanding and dialogue among managers
    • Serves to align organisational members to organisational mission
implications for managers42
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
implications for managers43
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)