Chapter 2 Adopting appropriate e-business models Paula Goulding.

Chapter 2Chapter 2

Adopting appropriate Adopting appropriate e-business modelse-business models

Paula GouldingPaula Goulding

ICT326 IS ManagementICT326 IS Management 22

Learning objectivesLearning objectives

What constitutes a business modelWhat constitutes a business model Why understanding and articulating a Why understanding and articulating a

business model is vital to an organisation business model is vital to an organisation achieving profitability and sustainabilityachieving profitability and sustainability

The essential components of a business The essential components of a business model, and some generic business modelsmodel, and some generic business models


Learning objectivesLearning objectives

How managers can use business models How managers can use business models and the implications of business models for and the implications of business models for managerial decision making and action managerial decision making and action takingtaking

The relationship between business models The relationship between business models and organisational strategyand organisational strategy


IntroductionIntroduction

Internet (& associated technologies) form Internet (& associated technologies) form foundation of global communication & foundation of global communication & information infrastructureinformation infrastructure– transforming industries & changing way transforming industries & changing way

business is conductedbusiness is conducted

need to investigate new models of need to investigate new models of business that effectively utilise potentiality business that effectively utilise potentiality of Internet & associated technologiesof Internet & associated technologies– ““gold rush” mentality of mid-late 1990s gold rush” mentality of mid-late 1990s

serious search for frameworks/models to serious search for frameworks/models to analyse & define e-commerce landscapeanalyse & define e-commerce landscape


What is a business model?What is a business model?

A A business model business model is a description of how a is a description of how a business works: its value chain, process business works: its value chain, process interactions, cost structure, and revenue interactions, cost structure, and revenue sources, how it will achieve profitability and sources, how it will achieve profitability and sustainability.sustainability.

BUT the term ‘business model’ is becoming a buzzword,and thus routinely misappropriated



Why focus on business models?Why focus on business models?– traditional, industrial age concept of how traditional, industrial age concept of how

business was conducted is very clearbusiness 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 work for an insurance company.

I sell cars.


Internet “disrupts” our understanding & Internet “disrupts” our understanding & presents new possibilities/potentialitiespresents new possibilities/potentialities– new (additional) channel for procuring & new (additional) channel for procuring &

distributing goods & servicesdistributing goods & services– highly interactive with new capabilitieshighly interactive with new capabilities




new business models needed to shape new business models needed to shape business practices in new business business practices in new business environmentenvironment– Value proposition (value delivered to Value proposition (value delivered to

customers), capabilities, sources of costs & customers), capabilities, sources of costs & revenues are generally less familiar & obvious, revenues are generally less familiar & obvious, & therefore need further analysis & articulation& therefore need further analysis & articulation



Function of Business Models Function of Business Models – Articulate value propositionArticulate value proposition

Value created for customers by goods/services (via Value created for customers by goods/services (via use of technology)use of technology)

– Identify market segmentIdentify market segment– Define structure of internal value chain required Define structure of internal value chain required

to create & distribute offeringto create & distribute offering



Function of Business ModelsFunction of Business Models– Consider cost structure and profit potential, Consider cost structure and profit potential,

given value proposition and value chain given value proposition and value chain structurestructure

– Describe position of firm within value networkDescribe position of firm within value network– Formulate competitive strategyFormulate competitive strategy


Customer managementCustomer management

Embraces a number of aspects associated Embraces a number of aspects associated with customers & relationships that with customers & relationships that organisation maintains with customersorganisation maintains with customers– Customer identificationCustomer identification

Which customer segment(s) do we serve? Are our Which customer segment(s) do we serve? Are our customers organisations or end consumers?customers organisations or end consumers?


Customer managementCustomer management

– Value propositionValue proposition Defines & describes the value an organisation Defines & describes the value an organisation

delivers to its customersdelivers to its customers Stems from perceptions of customers as to what is Stems from perceptions of customers as to what is

importantimportant

– Understanding & servicing customer Understanding & servicing customer requirementsrequirements

– Developing brand awarenessDeveloping brand awareness


Product & service portfolioProduct & service portfolio

What portfolio of products and/or services What portfolio of products and/or services and/or experiences does an organisation and/or experiences does an organisation offer its customers?offer its customers?– Broad or narrow range?Broad or narrow range?– Stand-alone or tightly integrated?Stand-alone or tightly integrated?

Where on the product lifecycle are an Where on the product lifecycle are an organisation’s products, services and organisation’s products, services and experiences?experiences?


Product & service portfolioProduct & service portfolio


Product Portfolios


Processes & activitiesProcesses & activities

What core business processes and activities does What core business processes and activities does an organisation require in order to deliver the an organisation require in order to deliver the value proposition to its customers?value proposition to its customers?– How should a business be configured?How should a business be configured?

Do these processes and activities imply a need to Do these processes and activities imply a need to develop external linkages to ensure delivery of develop external linkages to ensure delivery of value proposition, or can/should they be value proposition, or can/should they be performed internally?performed internally?


Resources, capabilities & assetsResources, capabilities & assets

What resources, capabilities, assets What resources, capabilities, assets do we need to deliver value do we need to deliver value proposition?proposition?– In-house or outsource?In-house or outsource?

How do we recruit & train human How do we recruit & train human resources needed for success?resources needed for success?


Suppliers & Business Suppliers & Business NetworksNetworks


Suppliers and Suppliers and Business NetworksBusiness Networks

Do we need close relationships with other Do we need close relationships with other organisations in order to deliver the value organisations in order to deliver the value proposition to customers?proposition to customers?

How to find & manage the resultant strategic How to find & manage the resultant strategic business network (SBN)?business network (SBN)?

Will SBN enhance our ability to be responsive, Will SBN enhance our ability to be responsive, flexible, agile in changing & competitive flexible, agile in changing & competitive environment?environment?


Financial ViabilityFinancial Viability

Profitability & sustainabilityProfitability & sustainability– Incoming revenues must exceed costs Incoming revenues must exceed costs

over timeover time– Typically costs are incurred before Typically costs are incurred before

revenues are receivedrevenues are received– Challenge is to manage cash flows to Challenge is to manage cash flows to

ensure sustainabilityensure sustainability



Sources of revenues?Sources of revenues?– Selling goods, servicesSelling goods, services– Selling advertising space, sponsorshipSelling advertising space, sponsorship– Commissions, subscription feesCommissions, subscription fees

When will revenues be generated?When will revenues be generated?– How moneys apportioned across SBN?How moneys apportioned across SBN?


CostsCosts– Identify total costs (all costs associated with design, Identify total costs (all costs associated with design,

developments and/or procurement of goods & services, developments and/or procurement of goods & services, and all costs incurred in delivering on value proposition and all costs incurred in delivering on value proposition of customers)of customers)

– Where are costs incurred?Where are costs incurred?– Understanding costs is essential to establishing pricing Understanding costs is essential to establishing pricing

mechanisms & policiesmechanisms & policies




Risk considerationsRisk considerations– What assumptions are being made about revenues What assumptions are being made about revenues

streams, costs, sales volumes? With what degree of streams, costs, sales volumes? With what degree of uncertainty?uncertainty?


Established price customers are willing to pay?Established price customers are willing to pay? When are goods / services expected to be When are goods / services expected to be

profitable?profitable? Have all costs been identified? All revenues? Have all costs been identified? All revenues?

Opportunities to leverage knowledge, technology Opportunities to leverage knowledge, technology or physical assets?or physical assets?

Has risk been considered?Has risk been considered?



Examples of business modelsExamples of business models

Importance of business modelsImportance of business models– A good business model does not guarantee successA good business model does not guarantee success– Must be implemented via appropriate strategies & Must be implemented via appropriate strategies &

effectively managedeffectively managed– Provides a coherent framework for managers to think Provides a coherent framework for managers to think

about elements of business & to avoid overlooking about elements of business & to avoid overlooking elements critical to successelements critical to success

– Given 6 elements, there are many ways of combining Given 6 elements, there are many ways of combining these to form organisational blueprintsthese to form organisational blueprints



Direct-to-Customer model Direct-to-Customer model – Basis of commercial transactions over the Basis of commercial transactions over the

Internet Internet Describes process of selling direct to customer via Describes process of selling direct to customer via

organisational websiteorganisational website Incorporates both supply-oriented transactions Incorporates both supply-oriented transactions

(organisation is in role of buyer) & demand-oriented (organisation is in role of buyer) & demand-oriented transactions (organisation is in role of seller)transactions (organisation is in role of seller)


Place, and/or space

Communicate directly

* individual* business

* wholesaler (Ingram books)* retailer (Wal-Mart)* producer (Gillete, Nike)

S B


Direct-to-Customer model


Direct-to-Customer modelDirect-to-Customer model – Customer managementCustomer management

Does moving online increase potential market, or does it Does moving online increase potential market, or does it cannibalise existing market?cannibalise existing market?

Does online service increase satisfaction & loyalty?Does online service increase satisfaction & loyalty? What is the customer value proposition? How is it enhanced or What is the customer value proposition? How is it enhanced or

supported through moving online?supported through moving online?

– Product & service portfolioProduct & service portfolio Are an organisation’s goods & services suited to selling online?Are an organisation’s goods & services suited to selling online?



Direct-to-Customer model Direct-to-Customer model – Processes & activitiesProcesses & activities

Need for excellent order fulfilment & deliveryNeed for excellent order fulfilment & delivery Are new processes & activities implied by the move online?Are new processes & activities implied by the move online? Is there a risk of channel conflict as a result of moving online?Is there a risk of channel conflict as a result of moving online?

– Resources, capabilities, assetsResources, capabilities, assets Required IT capabilities?Required IT capabilities? Warehousing, logistics capabilities for online trading?Warehousing, logistics capabilities for online trading?



Direct-to-Customer model Direct-to-Customer model – Suppliers & business networksSuppliers & business networks

Alliances needed with external providers of components of the Alliances needed with external providers of components of the value proposition?value proposition?

Skills needed to form and manage relationships?Skills needed to form and manage relationships?

– Financial viabilityFinancial viability Sources of revenue (online sales, selling advertising space, Sources of revenue (online sales, selling advertising space,

referrals?)referrals?) Sufficient financial resources for investments in IT & systems Sufficient financial resources for investments in IT & systems

integration?integration?



Intermediary model Intermediary model – An intermediary serves to mediate transaction An intermediary serves to mediate transaction

between buyer(s) and seller(s)between buyer(s) and seller(s)– Role of intermediary varies according to Role of intermediary varies according to

circumstancescircumstances



Communicate indirectly


S B

Examples of business Examples of business modelsmodels

I


Intermediaries:*broker / infomediary

*auction*portal

*B2B marketplaces

B

B

S

S

Intermediary model


Intermediary model Intermediary model – Types of intermediariesTypes of intermediaries

Broker or infomediaryBroker or infomediary AuctionsAuctions PortalsPortals Marketplaces or hubsMarketplaces or hubs



Intermediary modelIntermediary model – Customer managementCustomer management

Understanding range of services required of intermediary & Understanding range of services required of intermediary & valued by customers is essential to successvalued by customers is essential to success

Recognise potential for conflict between desires of buyers and Recognise potential for conflict between desires of buyers and needs of sellersneeds of sellers

– Product & service portfolioProduct & service portfolio Intermediary model often involves services onlyIntermediary model often involves services only ‘‘value’ attached to services must be capable of generating a value’ attached to services must be capable of generating a

stable source of revenuestable source of revenue



Intermediary model Intermediary model – Processes & activitiesProcesses & activities

Need for excellence in gathering and managing Need for excellence in gathering and managing information & knowledge (about buyers & sellers information & knowledge (about buyers & sellers requirements, about industry, about range of requirements, about industry, about range of products & services, etc)products & services, etc)

Excellence in integrating processes of buyers and Excellence in integrating processes of buyers and sellers requiredsellers required

– Resources, capabilities, assetsResources, capabilities, assets May be providing infrastructure to trading partiesMay be providing infrastructure to trading parties Must be structured to allow intermediary to retain Must be structured to allow intermediary to retain

control of transactionscontrol of transactions May require integration across organisational May require integration across organisational

boundariesboundaries



Intermediary model Intermediary model – Suppliers & business networksSuppliers & business networks

May require extensive use of business networks & May require extensive use of business networks & alliances (e.g. portals)alliances (e.g. portals)

Need to make decisions about which services Need to make decisions about which services provided internally as opposed to external providersprovided internally as opposed to external providers

– Financial viabilityFinancial viability Revenue streams from transaction fees, Revenue streams from transaction fees,

subscription fees, provision of online content, subscription fees, provision of online content, advertisingadvertising

Major costs stem from building robust infrastructure Major costs stem from building robust infrastructure & marketing& marketing

Must achieve critical mass of buyers and sellers to Must achieve critical mass of buyers and sellers to ensure transaction volume and future viabilityensure transaction volume and future viability




Content Provider model Content Provider model – provides content based on expertise, on-sold to third provides content based on expertise, on-sold to third

parties, or made available free of charge (e.g. weather parties, or made available free of charge (e.g. weather forecasts, news)forecasts, news)

– Revenues generated through sales of content, or Revenues generated through sales of content, or through selling advertising space on popular sitesthrough selling advertising space on popular sites

– often a variant of Direct-to-Customer modeloften a variant of Direct-to-Customer model


Implications for managersImplications for managers

Simple framework of business models Simple framework of business models helpful for enhancing understanding and helpful for enhancing understanding and dialogue among managersdialogue among managers– Serves to align organisational members to Serves to align organisational members to

organisational missionorganisational mission



Sound, coherent, articulated business model Sound, coherent, articulated business model essential for any businessessential for any business– Must be complemented by strategy that takes into Must be complemented by strategy that takes into

account competition, industry forces & the likeaccount competition, industry forces & the like Business model defines what an organisation is all Business model defines what an organisation is all

about, what is does, how it makes moneyabout, what is does, how it makes money– Strategy articulates how it will achieve goals and targetsStrategy articulates how it will achieve goals and targets



But… But… – Different researchers & writers do not Different researchers & writers do not

always approach the concept of a always approach the concept of a business model in a similar way…business model in a similar way…

– Consider the views of:Consider the views of: Harvard Business School (Applegate)Harvard Business School (Applegate) Aust. Graduate School of Management (Weill & Aust. Graduate School of Management (Weill &

Vitale)Vitale) Gartner group (Taylor & Terhune)Gartner group (Taylor & Terhune) Eisenmann (Harvard – 2002)Eisenmann (Harvard – 2002)


ReferencesReferences

Weill, P. and Vitale, M.R. (2001) Place to Space: Migrating to e-Business Models. Harvard Business School Press, Boston.

Eisenmann, T.R. (2002) Internet Business Models: Text and Cases. McGraw-Hill Irwin, Boston.

Taylor, D. and Terhune, A.D. (2001) Doing e-Business. Wiley, New York.

Chapter 2 Adopting appropriate e-business models Paula Goulding.

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