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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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Chapter 2 adopting appropriate e business models l.jpg

Chapter 2Adopting appropriate e-business models

Learning objectives l.jpg
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

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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

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  • 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

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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

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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


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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

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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

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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)

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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)

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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

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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

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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?

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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

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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?

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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?

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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?

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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?

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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

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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?

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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

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Financial Viability

  • Risk considerations

    • What assumptions are being made about revenues streams, costs, sales volumes? With what degree of uncertainty?

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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?

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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

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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)

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Examples of business models

Direct-to-Customer model

Place, and/or space



Communicate directly

* wholesaler (Ingram books)

* retailer (Wal-Mart)

* producer (Gillete, Nike)

* individual

* business

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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?

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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?

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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?

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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

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Examples of business models

Intermediary model



Communicate indirectly







*broker / infomediary



*B2B marketplaces

* individual

* business

* individual

* business

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Examples of business models

  • Intermediary model

    • Types of intermediaries

      • Broker or infomediary

      • Auctions

      • Portals

      • Marketplaces or hubs

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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

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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

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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

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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

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Implications for managers

  • Simple framework of business models helpful for enhancing understanding and dialogue among managers

    • Serves to align organisational members to organisational mission

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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

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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)