Electronic Business Models. Dr Sherif Kamel The American University in Cairo. Outline. Components of business models. eBusiness and change. B2B business models. B2C business models. Business models — today’s objective.
Electronic Business Models Dr Sherif Kamel The American University in Cairo
Outline • Components of business models. • eBusiness and change. • B2B business models. • B2C business models.
Business models — today’s objective • To develop an understanding of business models for the networked economy Where will the business compete? How will the business win?
Components of a business model Developing a business model in the networked economy requires four key choices on the part of the senior management: Value cluster • Specify the value proposition or the value cluster for the business Marketspace offering • Articulate the online product, service and information offer Resource system • Define how the company needs to align its resources to deliver the value proposition • Define and select the most appropriate revenue model to pursue Financial model
Value proposition/cluster The first step in the articulation of the business model is clearly specifying the value proposition or the value cluster for the business: • Defining the value proposition or the value cluster requires managers to answer the following questions: • Which target segments should the company focus on? • What is the combination of customer benefits that is offered? • What makes the firm and its partners better positioned to deliver the offering than anybody else? Value Cluster Marketspace offering Resource system Financial model
Value proposition/cluster The definition of the value proposition is the result of a combination of choices about the customers, the benefits offered and the unique capabilities of the firm: Target Segments Key Benefits Offered Unique Capabilities Value Proposition + + PC Flowers and Gift “The special occasion segment” • Fresh flowers • Complementary gifts • Low prices • Online experience • Unique, broad product line of complementary gifts “PC Flowers & Gift serves the special occasion segment by providing fresh flowers and unique complementary gifts” “Mid- to high-end market” • Easy delivery of flowers • Strong brand name • Market Communication • Supplier network “FTD.com provides the mid- to high-end market with the easiest way to send flowers thanks to its extended network of suppliers” FTD.com
CarPoint Example CarPoint’s value cluster offers benefits that address multiple segments of customers: Target Segments Key Benefits Offered Unique Capabilities Value Cluster + + CarPoint • Information about cars and their prices • Help on how to deal with dealers (tactics used, etc.) • Knowledge of the Internet • Software development expertise • “The efficiency of the Internet makes selecting and purchasing your car easier” • “The intimidated by the process” • “The information seekers” • Microsoft brand name • Network of partners • Extensive information • In different formats (3D views, pictures, videos) • From different sources (i.e., Kelley Blue Book) • “Provides a one-stop source with all the necessary information to make a car purchase”
Marketspace offering The next step is to articulate the online product, service and information offering: Value Cluster • Defining the Marketspace offering requires managers to complete the following sequential tasks: • Identify the scope of the offering • Identify the customer decision process • Map the offering to the consumer decision process Marketspace Offering Resource System Financial Model
Scope of the offering The scope of the offering refers to the number of categories of products and services offered on the site: Continuum of Scope Category-Specific Dominance Focus on one product category Cross-Category Dominance Focus on a large number of categories
Metamarkets The term ‘metamarkets’ refers to sites that group products and services that are closely related in the mind of customers: BabyCenter.com offers a good example of a “goal-derived” metamarket. The site’s products and information focus on one goal: raising a healthy child. • Shopping for baby and maternity products • Support community for parents • User personalization • Reference information • Support and help from experts
Customer decision process The second step in the construction of the online offering is the articulation of the customer decision process for the various product categories: Flowers Example Problem recognition • Need recognition, potentially triggered by a holiday, anniversary or everyday events • Search for ideas and offerings, including: • Available online and offline stores • Gift ideas and recommendations • Advice on selection style and match Pre-purchase Information search Evaluation of alternatives • Evaluation of alternatives along a number of dimensions, such as price, appeal, availability, etc. Purchase Purchase decision • Purchase decision • Message selection (medium and content) Satisfaction • Post-sales support • Order tracking • Customer service Post-purchase Loyalty • Education on flowers and decoration • Post-sale perks Disposal
Mapping the offering to the decision process • The last step in the construction of the online offering is mapping the products and services onto the customer decision process: • What occasions trigger the need for my product? What tactics can be used to stimulate demand? Customer Decision Process • Need Recognition • What information would the consumer need to make a selection? • Search for Ideas and Offerings • What post-sale services can the website offer to create loyalty? • Post-Sale Support and Perks • Evaluation of Alternatives • What are the key evaluation criteria that the consumer will use to evaluate my product/service? What information should the website offer to make the consumer comfortable with his or her choice? • Purchase Decision • What functionality should the site present to communicate privacy, trust and security?
Resource system The third step is to define the resource system and how the company must align it to deliver the benefits in the value proposition: Value cluster • A series of activities is required to construct a resource system: • Identify core benefits in the value cluster. • Identify capabilities that relate to each benefit. • Link resources to each capability. • Identify to what degree the firm can deliver each capability. • Identify partners who can complete capabilities. Marketspace offering Resource system Financial model
Step #1 — Identify core benefits The core benefits must be identified in the construction of the value cluster: 1-800-Flowers.com serves the “mid- to high-end market” with a broad gift assortment, fresh flowers,reasonable prices and easy access because of its strong brand name, product and media partnerships and bricks-and-mortar network of franchises. Broad Assortment of Gifts High Quality of Flowers Customer Service Widespread, Easy Access
Step #2 — Link capabilities to benefits Managers need to identify which capabilities are required to deliver each benefit, regardless (at this point) of the ability of the company to access or develop that capability: For 1-800-Flowers.com, the benefit “widespread, easy access” is linked to four capabilities: strong brand name, wide reach to customers, multiple points of contacts and a popular website. Broad Assortment of Gifts High Quality of Flowers Popular Website Multiple Contact Points Customer Service Widespread, Easy Access Wide Reach to Customers = Core benefits Strong Brand Name = Capabilities
Step #3 — Link resources to capability After the capabilities are identified, the firm should determined the resources necessary to deliver each capability: Broad Assortment of Gifts High Quality of Flowers Popular Website Telephone 3,000 Affiliates Online Franchise Stores Multiple Contact Points Customer Service Widespread, Easy Access Catalog Wide Reach to Customers Strong Brand Name = Core benefits = Activities & assets = Capabilities
Steps #4-5 — Ability to deliver capabilities The next steps assess whether the company has all the necessary capabilities in-house or if it has to look outside and select the most appropriate partners to complete the missing capabilities. 1-800-Flowers.com would not be able to deliver the capability “wide reach to customers” alone, and therefore would need to create partnerships. Companies like MSN, AOL and Snap are potential partners. Broad Assortment of Gifts High Quality of Flowers Popular Website Multiple Contact Points Starmedia Customer Service Widespread, Easy Access MSN Wide Reach to Customers AOL Snap = Core benefits Strong Brand Name = Activities & assets = Capabilities = Partners
Type of financial models A variety of financial models can be used to assess the value of the business model that follows from the resource system. Three examples are: Revenues Models Shareholder Value Models Growth Models • Identify the flow of cash into the organization • Assess how the company intends to generate cash flow or shareholder value • Assess how the company will be able to drive revenue growth
Revenue models While firms can pursue a number of revenue models, some are used most frequently: Advertising • Advertising revenues can be generated through the selling of ads, site sponsorships, event underwriting, etc. (e.g., Yahoo, AOL, Business2.com) Product, Service, Information • Revenues can be generated from the sales of goods and services (e.g., Amazon, CDNow, Buy.com) Transaction • Revenues can be accrued from charging a fee or taking a portion of the transaction sum for facilitating a customer-seller transaction (e.g., Schwab, eBay) Subscription • Website can gain revenues by offering subscription services for information • (e.g., www.FT.com, www.NYTimes.com)
Porter strategy model • Key concepts: • There are only three basic strategies • Each implies a different business model • Firms can pursue only one strategy at the time Possible Strategies Differentiation Cost Niche • Requires constant innovation and leadership on the benefits that matter most to the customer • Focus on gaining competitive advantage on costs while maintaining parity level on differentiation • Focus the business on a particular segment of the market and then pursue either differentiation or cost strategy Business Model Networked Economy Example • www.Travelocity.com • www.Lowestfare.com • www.Lastminute.com
eBusiness changes - basis of competition 1980s… Company vs. company 1990s…Supply chain vs. supply chain 2000s+…Business model vs. business model
eCommerce environment International Economic factors Legal constraints Cultural factors Macro-Environment Micro-Environment Technology Innovation Trends Society Public opinion Moral constraints Ethical constraints Organization Country Specific Economic factors Legal constraints Cultural factors Suppliers Competitors Intermediaries Customers
B2B business models • Business models and marketplace control • Suppliers • Customers • Intermediaries • Other business models • Virtual corporation • Networking between headquarters and subsidiaries • Online services to business
1. Supplier-oriented marketplace • Most common B2B business model. • Environment for most of over 85% of the manufacturer-driven electronic stores. • Individual consumers and business buyers use the model. • Architecture is the same for B2C.
Consumer Business Customer Supplier’s Electronic Store Consumer Supplier’s Products Catalog Customer’s Order Information Business Customer B2C EC B2B EC Supplier-Oriented B2B/B2C marketplace architecture
Cases • Dell Computers sold 90% of their computers to business buyers over the Internet. • Cisco sold 1 billion US dollars worth of routers, switches and network interconnections devices in 1998 through the Internet. • Need to have a good and dynamic web site and a group of loyal customers. • The model is not convenient to large and frequent buyers. • Information stored on the suppliers servers and not on the buyer’s information system. • B2B and B2C platforms differ in terms of shopping cart characteristics.
Case: www.ingram.com • Computer Reseller Ingram Micro. • Open only to existing and subscribed customers. • Building loyalty with its frequent buyers. • Sellers get rid of surplus goods and buyers are offered huge discounts. • Percentage of gain could be 600% more than offline auctions, on average.
2. Buyer-oriented marketplace • Ideal for large and frequent buyers. • Big buyers should open their own marketplace. • The marketplace is open on the buyer’s servers and suppliers are invited to bid on the announced RFQs. • Great opportunity for competitive and committed suppliers.
Business Supplier Buyer’s Electronic Store Business Supplier Buyer’s Requesting Products Catalog Supplier’s Bid Information Buyer-oriented B2B marketplace architecture
Cases • GE and Boeing are good examples. • It is becoming to be known as tender sites. • Introduction of online directories listing all RFQ sites.
Cases • Boeing’s PART, www.procure.net, www.manufacturing.net and www.industry.net • PART links Boeing to 300 key suppliers of its maintenance parts. • www.procure.net • Targets maintenance, repair and operations purchases • Online since 1996 with 30 seller sites and 100,000 products listed in electronic catalogs. • 1 million hits per month. • No registration, but only firms with validated information can buy from the seller sites. • www.industry.net has over 275,000 members from 36,000 organizations (1998). • 10,000 visitors daily directed to 53 seller sites. • www.industry.net charges between 2,500 and 250,000 US dollars for the online catalog searching.
3. Intermediary-oriented marketplace • The market place where consumers and business buyers meet. • Architecture is very close to that in the B2C cases.
Intermediary’s Electronic Store Business Supplier Business Customer Business Supplier Business Customer Customer’s Order Information Supplier’s Product Information Shared Product Catalog Intermediary-oriented B2B marketplace model
Virtual corporation • The most up-to-date re-engineered form of organizational structure = Virtual Corporation. • Typical organization with business partners sharing costs and resources for the purpose of producing a product or service. • Mainly dependent of B2B platforms. • Modern VC is a network of creative people, resources, and ideas connected by online services and/or the Internet.
Virtual corporation goals Excellence Utilization Opportunisim Each partner brings its core competence to form an all-star winning team Resources of the business partners are frequently under utilized, could be more profitable in the case of a VC VC can find and meet market opportunity Better than an individual company
B2B platform for virtual corporation • Electronic mail • Desktop video conferencing • Knowledge sharing • Groupware • EDI • EFT
Networking between headquarters and subsidiaries Franchiser vs. Franchisee • Electronic mail • Message boards • Chat rooms • Online corporate data access
Case: Marriott Hotels • Marriott as a chain has 1,500 hotels worldwide in 50 countries. • 600 of which = 40% are franchisee. • Revenues in 1998 = 10 Billion US Dollars. • Marriott went online in 1995 (Internet-based). • www.marriott.com receives orders worth 3 million US Dollars monthly. • Company intranet for 20,000 employees becoming extranet between all franchisee.
B2B and the supply chain • B2B applications consist of a series of processes and roles that represent the supply chain of a specific product and/or service. • External operations with partners outside the organization are as important as the interaction between the units within the organization. Raw material End-user Supply Chain Process
Supply chain divisions Internal Activities Upstream Activities Downstream Activities Involving distribution and sale of products to distributors and customers Involving manufacturing and packaging of goods Involving material and service inputs from suppliers
B2B insights • Backbone = Supply Chain Management • It represents the coordination or order generation, order taking, and order fulfilment and distribution of products, services and information • Contribution = Customers + Suppliers • Lower purchase costs • Reduced inventory • Enhanced efficiency of logistics • Increased sales • Lower sales and marketing costs
B2B components B2B components Selling = electronic marketing Purchasing = procurement management Electronic Intermediary = service provider Delivery = JIT Network Platform = internet/intranet/extranet Communication Protocol = EDI Back-End IS = ERP systems
Online services to business • Famous online services include: • Tourism • Employment placement/job market • Real state • Trading stocks • Cyber banking • Insurance • Auctions
It is important to note that… • There are 2 categories of internet businesses • Pure play • Businesses having only an online presence • www.amazon.com • www.ebay.com • Bricks and clicks • Businesses combining online presence with traditional offline operations. • www.bn.com • www.nordstrom.com • www.nytimes.com