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Internet Business Strategies and

Business Models

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Outline

The Internet Value Proposition Four Strategies New Competitive Threats New Competitive Opportunities Business Models

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The Internet Value Proposition

Internet commerce must start with a strategy, and the analysis of the strategy starts with value. What are the sources of Internet value?

It is believed that the ability of the Internet to change the landscape of commerce comes from 2 key ideas:• The Internet can be used to transform customer relationships,

and

• The Internet can displace or alter traditional sources of business value.

These 2 ideas lead to 4 basic strategies for businesses to consider both in exploiting the Internet and in defending themselves against competitors.

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The Internet Value Proposition (cont.)

Transforming Customer Relationships:• By exploiting the Internet, traditional commerce

evolves from being supplier-centered to being customer-centered.

• This leads to two business strategies:

• A customer-centered business organized around a product (called Channel Master strategy), or

• A customer-centered business organized around meeting the needs of a group of customers (called Customer Magnet strategy).

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The Internet Value Proposition (cont.)

Displacing/altering traditional sources of business value.• The Internet moves commerce from the

physical world to the information world.

• A focus on the supply chain leads to the Value Chain Pirate strategy.

• A focus on distribution – reaching the customer – leads to the Digital Distributor strategy.

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Four Internet Business Strategies

Channel Master Customer Magnet Value Chain Pirate Digital Distributor

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Channel Master The channel master strategy works by using the Internet

to build deeper customer relationships in order to sell traditional goods or services.

This strategy is organized around products, concentrating on the best possible delivery of those products and their related services.

A company using the channel master strategy must re-engineer all its customer-facing activities.

In other words, the company must integrate the commerce value chain with their existing operations

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Example of Channel Master: Cisco Systems Cisco Systems is an $18 billion provider of Internet

software, hardware and services. It uses its Web site as the primary sales channel to its customers and partners.

Attract (get and keep customer interest):• Full online catalog

• Demonstration of ordering process

• Customers are notified of price changes Interact (turn interest into orders):

• The online catalog enables searching, browsing, and configuration of purchases.

• Intelligent agents suggest alternatives (such as software upgrades) and identify errors.

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Example of Channel Master: Cisco Systems (cont.) Act (coordinate order fulfillment):

• Orders link to procurement and order management databases.

• Customers can monitor or receive notifications about order status.

React (provide after-sales service):• Customers can access comprehensive documentation and

self-help intelligent agents.• A Bug Alert mechanism automatically notifies customers of

bugs. Results:

• 70% of all product support is delivered through the Internet.• Large fraction of orders arrive through the Internet channel.

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Customer Magnet The customer magnet strategy works by using the

Internet to attract a group of customers by meeting their needs with a knowledge sharing environment and aggregated supplier access.

This strategy is organized around a group of customers, delivering a broad range of products and services to these customers.

A company using the customer magnet strategy seeks to be the destination of choice for a whole category of customers.

A customer magnet must integrate the value chains of multiple suppliers into one customer-facing whole.

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Example of Customer Magnet: Yahoo Yahoo tries to be the first place for people to visit when

they go online. In addition to providing information, Yahoo offers free

services such as e-mail, instant messenger, and Web sites (via GeoCities).

Attract (get and keep customer interest):• Yahoo offers tremendous amount of free information and

links to other sites.• Members can participate in discussion groups, real time

conferences on many topics, and can set up new ones via Yahoo Clubs.

Interact (turn interest into orders):• Yahoo operates Yahoo Shopping, which offers retail

shopping, warehouse shopping, auctions, and classified ads.

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Example of Customer Magnet: Yahoo (cont.)

Act (coordinate order fulfillment):• Yahoo shops offer the usual array of delivery

options.

• Yahoo also offers the ability to set up and operate a new shop within Yahoo Shopping

React (provide after-sales service):• Although many Yahoo shops are operated by

other businesses, Yahoo has offered a uniform level of after-sales service through a buyer protection program that covers all Yahoo shops.

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Value Chain Pirate

The value chain pirate strategy works by capturing someone’s margins and displacing them from their value chains.

This strategy is organized around the value chain, seeking to connect suppliers with customers more directly.

A business using the value chain pirate strategy seeks the positions on the value chain that offer the greatest leverage.

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Example of Value Chain Pirate: Autoweb Autoweb displaces part of the value chain of

car dealerships by selling cars directly to consumers (with the actual delivery handled by a traditional dealer).

Attract (get and keep customer interest):• Autoweb offers no-haggle service backed by extensive

online information about cars and options. Interact (turn interest into orders):

• Autoweb has complete information about cars, options, and colors available.

• Customers can accurately request a quote for the vehicle of their choice.

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Example of Value Chain Pirate: Autoweb (cont.)

Act (coordinate order fulfillment):• Autoweb uses traditional dealerships for

delivery and service.

• It has partnerships with other companies to provide insurance and financing.

React (provide after-sales service):• Autoweb provides extensive information on

warranty issues, insurance, recalls, repairs, and maintenance.

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Digital Distributor

The digital distributor strategy works by focusing on pieces of value that can be delivered better through the Internet.

A company using this strategy is organized around disaggregating traditional bundles of products and re-aggregating products and services that can be delivered efficiently through the Internet.

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Example of Digital Distributor: Monster.com Monster.com began by offering online employment

advertising for high-technology jobs. As the Internet has become a cross section of global

society, Monster.com has added job listings spanning all industries and has built a global network of national services.

It has also aggregated other services related to career management, such as resume listings, moving, real estate, education and finance.

Attract (get and keep customer interest):• Offers free services to individuals

• Attracts employers who pay for their listings

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Example of Digital Distributor: Monster.com (cont.)

Interact (turn interest into transactions):

• Monstere.com offers automatic Job Search Agents, which sends e-mail to customers to alert them about new job postings that match the profile of their desired jobs.

Act (coordinate fulfillment):

• Offers a variety of tools such as resume screening for employers

• Facilitates closing a new job (e.g., cover letter management) React (provide after-transaction service):

• Offers several services such as apartment finder and moving services to assist individuals who have found new jobs

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New Competitive Threats Each of the four Internet business strategies can be used

alone or in combination by competitors, and each forms a different kind of threat to a business.

Channel Master:• Can competitors create superior channels to your

customers?• Your customers could be attracted by better prices, better

services, etc. from your competitors Customer Magnet:

• Can competitors attract your customers and sell them your products?

• Your could lose your customer base to someone offering a broader range of services, and be forced to survive as a commodity wholesale supplier to your competitor.

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New Competitive Threats (cont.) Value Chain Pirate:

• Can competitors hijack your position in the value chain?

• Your supplier could leapfrog your position and sell directly to your customers.

• Your distributor could obtain parts directly from your suppliers.

Digital Distributor:• Can competitors disaggregate your value proposition?• If your value proposition is based on an aggregation of

goods and services, it is possible for a competitor to excel at some part of the overall offering.

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New Competitive Opportunities The four Internet business strategies also provide new

competitive opportunities. Channel Master:

• Can you improve your customers’ buying experience by improving your cost, convenience, or ability to customize?

Customer Magnet:• Do your customers share broad needs that lend themselves

to new bundles of products and services? Value Chain Pirate:

• Can you jump over your direct suppliers or customers and capture their margins?

Digital Distributor:• What parts of other companies’ propositions could you

improve by offering them on the Internet?

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Business Segments We use the word “segment” to describe collections of

businesses with similar requirements for Internet commerce, whether or not they are in the same business area.

Three business segments are selected for consideration of system requirements and design options:• Consumer Retail: Businesses selling physical goods

directly to individual end consumers.• Business-to-Business Cataloging: Businesses with

online catalogs selling products to other businesses. We focus on MRO (Maintenance, Repair, and Operations) goods.

• Information Commerce: Businesses distributing digital goods (e.g., information products and services) online with fulfillment right over the network.

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Consumer Retail: Value Proposition

Ability to reach a global market Reduced marketing and selling expenses Increased efficiency of operation Ability to target consumers more precisely Ability to convey more accurate and timely

product and availability information

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B-to-B Cataloging: Value Proposition

Reduced cost of selling Reduced order processing costs Improved service levels for low-volume

customers Higher-quality information for customers Accurate information

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Information Commerce: Value Proposition

Collapse of the traditional distribution chain• On the Internet, information providers have

direct access to information consumers without an intervening distribution channel.

Ability to explore new business models• Because the Internet is ultimately flexible,

information providers can easily experiment new business models such as software rentals, pay-per-view documents, etc.

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Information Commerce: Business Models

Advertiser Support:• A content provider can generate revenue through

advertising.

• Advertisers pay for impressions: a set of eyes looking at their advertisement.

• Advertisers pay for a site that has interesting and compelling content attracting lots of visitors.

• Advertisers will pay more if the site can also collect information from visitors such as age, sex, postal code etc.

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Information Commerce: Business Models (cont.)

Subscription Services:• Subscriptions are traditional models for print, but can

also work online.

• Consumers pay a fee for access to online information. Bundling Arrangements:

• In order to achieve a sufficient, critical mass of information to attract visitors, content owners may sell access rights to each other.

• Thus, a service provider who is not directly in the content business may license access to content for their users.

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Information Commerce: Business Models (cont.)

Document Sales:• This is a broad category including the online sale of

research reports, articles, or software etc.

Usage-Based Charging:• Users pay according to their usage.

• Usage can include connect time, search queries, number of pages viewed etc.

• Information products (e.g., online newspapers, etc.) and information services (e.g., search engines, online games, etc.) are eligible to usage-based charging.

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Information Commerce: Business Models (cont.) Information Marketplace:

• Because the Internet greatly reduces transaction costs, it could lead to a world in which the ultimate providers of information sell directly to the ultimate consumers in a vast information marketplace.

• Necessary components:

• Rights management for authors and publishers

• Containers (to protect information in transit and before sale)

• Super-distribution to distribute information in secure containers

• Clearinghouses to collect fees from end users and distribute them to information providers

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References

G. Winfield Treese and Lawrence C. Stewart. Designing Systems for Internet Commerce (2nd edition): Chapters 3 & 4. Addison Wesley.

Dr. Thomas Tran Slides