Bba401 Slm Unit 06

Unit 6 Business Models

Structure

6.1 Introduction

Objectives

6.2 Evolution of Internet Business Models

6.3 Business Models in Practice

6.4 Business Model: The Six Components

6.5 Summary

6.6 Glossary

6.7 Terminal Questions

6.8 Answers

References

6.1 Introduction

In the previous units, you have learned that e-commerce is a business transaction

that is performed using an electronic medium. This unit discusses the types of

transactions in an e-commerce. A transaction in an electronic market describes

the number of interactions between parties, for example, ordering, making

payment, supporting delivery and of course marketing.

One must therefore have a marketing strategy for transacting commerce

through which a corporation maintains itself and generates revenue. Business

models are created for the purpose of trying to answer the following questions:

(i) How can you get competitive advantage?

(ii) Which product-market strategy should be followed?

(iii) What should be the marketing mix?

Business models are defined as, ‘A set of shared common characteristics,

behaviour and methods of doing business that enables a firm to generate profits

through increasing revenues and reducing cost.’

E-Commerce Unit 6

Sikkim Manipal University Page No. 100

Raw material producer

Manufacturer

Distributor

Retailer

Consumer

Business-to-

Business-to-

Business

Business

Thus, in this unit, you will learn about the evolution of the Internet business

models and the business models that are currently in vogue. The latter is of

three types, namely business-to-business (B2B), business-to-consumer (B2C)

and consumer-to-consumer (C2C). It will also familiarize you with the six

components of a business model. This will help you to differentiate between a

business model and a revenue model. This unit will also elaborate on the role of

business models. To get value from a new product, a firm needs a proper

business model. You will learn how business models differ from business strategy,

and about entrepreneurial advantage.

Objectives

After studying this unit, you should be able to:

• Discuss the evolution of Internet-based business models

• Evaluate the business models in practice

• Identify the components of business models

• Summarize the functioning of business models vis-à-vis revenue models

• State the role of a business model

• Differentiate between business model and business strategy

• Classify the advantages of entrepreneurship

6.2 Evolution of Internet Business Models

In the past few years, e-commerce has pervaded every aspect of daily life. In a

very short time since its evolution, both people and institutions have used Internet

technologies to increase production, increase convenience and enhance

communications worldwide. The Internet has become integral to daily activities—

from banking to shopping and entertainment. For example, just a few years

ago, many people went into a bank and interacted with other people to conduct

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regular banking. Today, people have embraced the automated teller machine

(ATM) that has made banking easy. Today, millions of people rely on the Internet

banking services for their banking needs.

The fast expansion and general acceptance of online business has people

wondering as to why this e-commerce did not happen earlier. The answer is

quite simple; the technology and infrastructure needed were not there to support

e-commerce. Consider, the example of computers—many business enterprises

used large mainframe computers with private data formats. These were not

easy to share with home or office users. The ubiquitous personal computers

(PCs) were not generally available. Thus, only a few computers outside the

business circle could get that information. Even when PCs became popular,

both in offices and at homes, the ability to process business was restricted.

This was because the infrastructure needed was not available.

At the same time, to set up an online or e-commerce earlier, it required

the individual company to develop the whole technology infrastructure. It was

required to develop its own business and marketing planning. However, these

days this is not the case. Now the only problem of an e-commerce is how to

integrate its business, because now many companies have resolved the complex

work of (i) developing individual Internet-based products and (ii) services that

take care of the problems of customer and supply interactions. Nevertheless,

the real challenge is the ability to combine these technologies and services

based on solid business and marketing plans, working on a real-time basis.

Today, the growth of e-commerce is at a fast pace as both organizations

and consumers have access to the Internet, either from their homes or offices.

Thus, there is excitement and the potential for success has also grown. At the

same time, the tremendous growth of the Internet has led to challenges of

increased integration of e-commerce of all capability and capacity.

The growth of e-commerce can be studied at two phases. Companies in

the first phase set up e-commerce, when e-commerce technology was new to

the market.

The trend of companies that set up e-commerce in the first phase are as

follows:

• Business organizations rushed to get an e-commerce website up.

• Little or no regard was given to check how scalable or reliable the site

needed to be.

• It was a matter of beating competition.

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Another drawback of these first-to-market consumer sites was that there

was no or little integration with the production side of the business. The production

part of the business tried to establish its own online-based relationship with

suppliers. Thus, the lack of integration proved to be a major obstacle for many

business organizations. This was due to:

• Growth of customer base

• Request for real-time order status

• Return of products

Today, in the second phase of establishing an e-commerce, owning a

website is not considered to be a way to distinguish a business. The expectations

of customers and suppliers have increased manifold. Organizations are forced

to start planning about integrating the back-end and real-time transaction

processing. Business organizations should maintain a complete customer–

supplier relationship with the help of Internet-based technologies and join those

systems to the interpersonal aspects of the business transaction when needed.

Many businesses have realized the prospects of e-commerce and are addressing

the whole business cycle and controlling the Internet technologies.

It can be concluded that these days, online business has the power to

change the business scene. Previously, the business model of a company was

considered to be the basic determination of its value. Nowadays, the value of a

company is based on its strategy, business model and its ability to sell.

Technology has started a new competition. Businesses using Internet

technologies and integrating their systems and processes more efficiently now

break the barriers and make it to the Fortune 500 stalwart. These start-ups are

able to vastly reduce the obstacle to entry while significantly increasing their

own market reach. This has been possible due to the following:

(i) Capitalizing on a continuous business proposal

(ii) Rightly applying technology.

In e-commerce, the motto is ‘first to market equals first to success.’

Nevertheless, a sound foundation has to be made. Using Internet technologies

is important to be successful in this business.

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Self-Assessment Questions

1. State whether the following statements are true or false.

(a) Today, both people and institutions use Internet technologies to

increase production and enhance communications worldwide.

(b) Companies in the first phase set up e-commerce when e-commerce

technology was in its infancy.

2. Fill in the blanks with the appropriate words.

(a) One of the drawbacks of the first-to-market consumer sites was that

there was no integration with the _________of the business.

(b) Today, the value of a company is based on its strategy, business

model and_______.

6.3 Business Models in Practice

There are three fundamental types of business models in practice. These are:

1. Business-to-Business (B2B)

2. Business-to-Consumer (B2C)

3. Consumer-to-Consumer (C2C)

Table 6.1 Summary of E-Commerce Model

Model Description Example of Website

Business-to-Consumer

Goods or services sold directly to consumers

pets.com, edirects.com, amazon.com, autobytel.com

Business-to-Business

Goods or services sold between business and other businesses

verticalnet.com, metalsite.com, shop2gether.com

Business-to-Government

Goods or services sold to government agencies

igov.com

Consumer-to-Consumer

Goods or services sold between consumers

ebay.com, inforocket.com

Consumer-to-Business

Consumers fix the cost of their goods or services for other consumer

priceline.com

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1. Business-to-Business Model

The business-to-business (B2B) model needs two or more business

organizations that do business with each other. It entails commercial activity

among companies through the Internet as a medium. At present, there are

many types of e-commercees. The B2B e-commerce is of the following types:

(a) Supplier oriented

In this type of B2B e-commerce, a supplier establishes the electronic market

where a number of customers or buyers transact with suppliers. Generally, it is

done by a supplier which has monopoly over products that it supplies.

(b) Buyer oriented

In this type of B2B electronic commerce, big business organizations with high

volume purchase capacity creates an e-commerce marketplace for purchases

and gains by starting a site of their own. The online e-commerce marketplace is

used by buyers for placing requests for quotations and carrying out the entire

purchase process.

(c) Intermediary oriented

In this type of B2B e-commerce, a third party establishes the e-commerce

marketplace and attracts both buyers and sellers to interact with each other.

Application of B2B model

Some of the applications of B2B model are, inventory management, channel

management, distribution management, order fulfilment and delivery payment

and payment management.

2. Business-to-Consumer Model

The business to consumer model clearly concentrates on individual buyers and

is thus known as Business-to-Consumer (B2C) model. The B2C model offers

consumers the capabilities to browse, select and merchandise online from a

wider variety of sellers and at better prices. The B2C e-commerce interaction is

most appropriate for the following types of transactions:

(i) Easily transformable goods, i.e., products that are easily transformable

into digital format, such as videos, software packages, music books, and

so on

(ii) Highly rated branded items or items with return security

(iii) Items sold in packets that are not possible to open in physical stores

(iv) Items that follow standard specification

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The following steps summarizes the working of B2C:

(i) The customer identifies his/her need.

(ii) Then, the customer looks for the product or service that suit his/her needs.

(iii) The customer selects a vendor and negotiates a price.

(iv) The customer then receives the product or service.

(v) The customer makes the payment for the received product service.

(vi) The customer gets the services and warranty claims that are associated

with the product.

3. Consumer-to-Consumer Model

In a consumer-to-consumer (C2C) model, consumers sell directly to other

consumers via online classified advertisements and auctions or by selling

personal services or expertise online. The C2C model involves the growing

popularity of peer-to-peer (P2P) software that facilities the exchange of data

directly between individuals over the Internet.

Table 6.2 Summary of Business Models

Model Description Example

B2B One business sells products or services to other businesses

metalsite.com

B2C Business sells products or services directly to consumers

amazon.com

C2C Consumer sells directly to other consumers

ebay.com

Activity 1

Research on the Net and prepare a table showing the evolution of business

models and the contributions of important personalities towards the same.



(a) There are four basic types of business models.

(b) In consumer to business models, consumers fix the cost of their

goods or services for other consumers.

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4. Fill in the blanks with the appropriate word.

(a) A_______needs two or more business organizations that do business

with each other.

(b) In intermediary-oriented B2B e-commerce, a______establishes the

e-commerce marketplace and attracts both sellers and buyers to

interact with each other.

6.4 Business Model: The Six Components

According to Henry Chesbrough and Richard S. Rosenbloom there are six

components of a business model, namely :

(i) Value proposition

(ii) Market segment

(iii) Value chain structure

(iv) Revenue generation and margins

(v) Position in the value network

(vi) Competitive strategy.

(i) Value proposition: It has three components as follows:

(a) It is an explanation of any problem faced by a customer.

(b) It is about the resolution of that problem

(c) It is the value of this resolution from the customer’s point of view.

(ii) Market segment: Since diverse market segments have different

requirements, it boils down to which group to target. At times, the full

benefit of a new product development is realized only when a new market

segment is focused.

(iii) Value chain structure: The concept of value chain structure demonstrates

the company's place and the value addition tasks done by it in the value

chain. It also shows in what ways the company captures part of the value,

which it has helped to add in the chain.

(iv) Creation of revenue and profits: It means how income is created in the

business, such as rental, sales, subscription, and so on. It also includes

revenue made from the target profit margins and the cost structure.

(v) Place in the value network: It identifies competitors and sellers whose

products, services or relationships create more demand for your product.

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It also looks for other effects in the business network that might be used

to give more value to the customer.

(vi) Competitive strategy: It refers to the ways in which a business

organization tries to expand a permanent competitive benefit and utilize it

to advance the competitive situation of the company in the market.

6.4.1 Business Model vs Revenue Model

The term ‘business model’ is a broad term that explains things, such as the

place of a business organization in the value chain, the choice of the customers,

products and the cost of doing business. The business model plans the course

through which the company would in fact make profit. It states clearly the price

it would charge the customers.

The old model corporations have been discredited as overmanaged,

overcontrolled and overstructured but underlet. Thus, today’s top managers

should focus on their real managerial skills that would bring success to the firm

in the future. Today, a brand latest business model has come up. Here many of

the important tasks of the company are delegated to the different individual

parts, but synergy results from the vigour of the employees and unrestricted

flow of information.

6.4.2 Role of a Business Model

To profit from an innovation in a product or a service, a new firm or a start-up

needs an appropriate business model so that it is able to exploit its innovation

and be the market leader. Business models are needed to bring in new

technology that will yield an economic value. As the old and familiar business

models cannot be used for all new firms, new business models are planned.

The importance of the business model cannot be denied, because in many

cases the profitability of the innovation rests more on the business model itself

than on the product or service provided by the innovation. In their paper, ‘The

Role of the Business Model in Capturing Value from Innovation’, Henry

Chesbrough and Richard S. Rosenbloom provide a crucial structure explaining

the basics of a business model. As there is a complex inter-play of markets,

products and the environment in which a business organization runs, it is very

difficult to understand the organization’s responsibility in its totality. While

business experts are acquainted in their area, technical experts understand

theirs. Figure 6.1 makes it clear how the business model serves to connect

these two domains.

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EconomicOutputs

TechnicalInputs

BusinessModel

Figure 6.1 Role of a Business Model

Many business subjects including finance, economics, entrepreneurship,

marketing operations and strategy are used to finalize a business model. The

business model itself is an essential determinant of the profits to be generated

from an innovation. A below average innovation with a great business model

could be more profitable than a good innovation with a below average business

model.

6.4.3 Business Model vs Business Strategy

You have read earlier in this unit about the six components of business models

by Chesbrough and Rosenbloom. They further strike a comparison between

the concept of the business model to that of strategy, identifying the following

three differences:

(i) Creating value vs capturing value: The focus of the business model is

on the creation of value. Though the business model only addresses how

that value would be captured by the organization, strategy focusses on

building a sustainable competitive advantage.

(ii) Business value vs shareholder value: The business model helps in

the conversion of innovation to yield economic value for the businesses,

but it does not focus on delivering business value to the shareholders.

For instance, though the business model does not consider the financing

methods, nonetheless, it impacts shareholder value.

(iii) Assumed knowledge levels: Business model assumes a limited

environmental knowledge, even though strategy is dependent on a more

intricate examination that needs more conviction about the environment.

6.4.4 Advantages of Entrepreneurship

According to Chesbrough and Rosenbloom, a good business model like Xerox

has a tendency to establish thrust, but the company remains constrained to its

thriving model. At the same time, the coming up of new technologies forces

business organizations to evolve new business models. This gives new

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companies or start-ups a freehand to make a choice or even develop a new

business model themselves. Otherwise, in adddtion to the risk taken up in the

technology and economic areas, an unproven business model increases the

risk further. Business ventures, generally, are more prepared to acknowledge

this risk.

On the other hand, many venture capitalists fancy themselves as investors

in business models. Thus, when it becomes obvious that the previous model is

not working, the venture capitalists often try and push for a change in the business

model.

Activity 2

A below-average innovation with a great business model could be more

profitable than a good innovation with a below average business model.

Justify this statement citing an example.



(a) According to Rosenbloom and Chesborough, a business model has

five components.

(b) A business model enables to bring the technical experts and business

experts to the same platform.

6. Fill in the blanks with the appropriate word.

(a) The___________plans the course through which a company would

make profit.

(b) Business strategy focuses in delivering _____________to the

shareholders.

6.5 Summary

Let us recapitulate the important concepts discussed in this unit:

• In a very short period since its evolution, the Internet has become integral

to the daily activities of people.

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• Today, three basic types of business models are used—business-to-

business, business-to-consumer and consumer-to-consumer models.

• According to Henry Chesbrough and Rosenbloom, a business model has

six components.

• A business model plans the course through which a company would make

profit and also states the price of the product/service it would charge the

customers.

• To really profit from an innovative product or service, a firm needs an

appropriate business model so that it is able to exploit its innovation and

be the market leader.

6.6 Glossary

• E-commerce: A business interaction that is performed by using the

electronic medium

• Business model: A set of shared common characteristics, behaviour

and methods of doing business that enables a firm to generate profits

through increasing revenues and reducing cost

• Consumer-to-consumer: Consumers sell directly to other consumers

via online classified advertisements and auctions or by selling personal

services or expertise online

• Buyer oriented business: The online e-commerce marketplace is used

by buyers for placing requests for quotations and carrying out the entire

purchase process

• Intermediary-oriented: A type of B2B e-commerce, is which a third party

establishes the e-commerce marketplace and attracts both buyers and

sellers to interact with each other

• Internet banking: A system allowing individuals to perform banking

activities at home, via the Internet

• Digital format: Use of discrete integral numbers in a given base to

represent all the quantities that occur in a problem or calculation

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6.7 Terminal Questions

1. Describe the evolution of Internet-based business models.

2. Discuss the main features of the three fundamental types of business

models.

3. Describe the six components of business models.

4. Summarize the role of a business model.

5. Differentiate between a business model and business strategy. State the

differences in tabular form.

6. Prepare a list of the advantages of entrepreneurship.

6.8 Answers

Answers to Self-Assessment Questions

1. (a) True; (b) True

2. (a) production side; (b) its ability to sell

3. (a) False; (b) True

4. (a) B2B model; (b) third party

5. (a) False; (b) True

6. (a) business model; (b) value

Answers to Terminal Questions

1. Refer to Section 6.2



4. Refer to Section 6.4.2



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References

1. Turban, Efraim, Jae Kuy Lee and Michael Chung. Electronic Commerce:

A Managerial Perspective. Prentice-Hall, 1999.

2. Whitley, David. E-Commerce: Strategy, Technologies and Applications.

Tata McGraw-Hill, 1998.

Bba401 Slm Unit 06

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