SECTION 2: Digital Value Chain, E-Business Models

Teemu Hakolahti

teemu.hakolahti@scp.fi

Digital Value Chain

Value Chain Analysis (Porter, 1985)

The primary value chain activities (Porter, 1985)

• Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required.

• Operations: the processes of transforming inputs into finished products and services.

• Outbound Logistics: the warehousing and distribution of finished goods.

• Marketing & Sales: the identification of customer needs and the generation of sales.

• Service: the support of customers after the products and services are sold to them.

Supporting activities(Porter, 1985)

• The infrastructure of the firm: organizational structure, control systems, company culture, etc.

• Human resource management: employee recruiting, hiring, training, development, and compensation.

• Technology development: technologies to support value-creating activities.

• Procurement: purchasing inputs such as materials, supplies, and equipment.

Value Chain Definition• Profit depends on its effectiveness in performing these

activities the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain.

• A competitive advantage can be achieved by reconfiguring the value chain

• The value chain model is a useful analysis tool for defining a firm's core competencies and the activities:

– Cost advantage: by better understanding costs and squeezing them out of the value-adding activities.

– Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors.

Changes in Value Chain(Kalakota & Robinson 2001)

Core competence of the company

Firm infrastructure and processes

Products & Services

Distribution channels

Customers

Core competence of the company and outsourcing

Flexible infrastructure and

processes

Products & Services

Integrated distribution

channelsNeeds of customer

Traditional value chain

Changed value chain

Digital Value Chain

• How business creates value in both the physical and virtual level?

Interpret differences and interactions among the value adding events of the physical and virtual level

• Create valuable digital assets that change the competitive dynamics of industries (Sviokla and Rayport, 1996)

Virtual Value Chain(Rayport, Sviokla, 1996)

• Visibility: is where businesses co-ordinate, measure and sometimes control business processes

• Mirroring capability: physical steps in the value chain may be substituted with virtual ones– In banking, whereas banks offered a limited

portfolio of services • Companies use the flow of information in

their virtual value chain to create new customer relationships by delivering value to customers in new ways– E.g. FedEx, package tracking

Intermediation & Disintermediation• Approaches to change the value chain• Business that had previously sold to

retailers via distributors could take a decision to sell direct electronically, an approach known as Disintermediation

• By shortening the Value Chain, there may be benefits in reduced costs or a more responsive and efficient service

Reintermediation

• eBusiness allows the apparent opposite of Disintermediation in which a new step or steps are introduced to the value chain to add value to the process.

• This is known as Reintermediation and examples here include shopping portals and electronic insurance brokers.

E-Business Models

Business Model

• Business model is an architecture for product, service and information flow, including description of the various business partners and their roles.

• It also contains a description of potential benefits for the actors and a description of the sources of revenue

• Existing business need to use the Internet to build on their current business model, while at the same time experimenting with new business models to gain a competitive advantage over competitors

E-Business Model

• E-business is defined as the transformation of key business processes through the use the Internet technologies

• When a company has integrated information and communications technologies (ICTs) into its operations, potentially redesigning its business processes around ICT, then company has adopted a new business model

(Source: Chaffey, 2002)

Components of Business Model

Value Proposition

Online Offering

Resource System

Revenue Model

Source: Rayport & Jaworski, 2004

Value Proposition

• Value proposition is constructed from three things:

1. target segmentation2. focal customer benefits,3. the key resource of the business that can help

deliver the benefit package in significantly better way than its competitors

• However, the value cluster approach in online businesses has acquired customisation capabilities that allow them to address multiple customer segments and offer a variety of benefits

Online offering

• After the value proposition has been defined, the next step is to decide products, services and information for the online offering

• three sequential tasks must be completed :

1. identify the scope of the offering, 2. identify the customer decision-making

process,3. map the online offerings to the customer

decision process

Resource System

• The resource system shows how a company must select its allies and partners in a business web to deliver the benefits of the value proposition or cluster

• Business web (b-web) is a distinct system of suppliers, distributors, commerce service providers, infrastructure providers and customers that use internet for their primary business communications and transactions

Revenue Model

• It is often difficult to align the revenue model to company’s value proposition and online offering

• Companies are trying to figure out what their customers are willing to pay for, and how much they are willing to pay

Sources of revenue• Advertising. A particular site derives revenue

through the sales of advertisements, banners, site sponsorships, event underwriting or other forms of communication.

• Product, service or information sales. The income is generated from the sale of goods on the site.

• Transaction. The revenue is accrued from charging a fee or taking a portion based cost from transactions.

• Subscription. Information and service are a provided on the subscription basis where and access relationship is created on the basis of a fee.

• Licence fee. Content is licensed for use for a fee.

Example: Revenue Model for music (see next 2 slides)• Record company’s share of revenues:

– Traditional CD = 12%– Digital download = 47%

• Music price for customer:– Cost of traditional cd =17$– Digital download (depends amount of songs,

normally 12- 14 songs, each 1$, totally ~ 14$)

WIN –WIN situation for both, record company and customer. But who loses?

Revenue model for a CD(Source: keepmusiccoming.com)

Revenue model for US digital download (Source: FAD Research,

2004)

Business Model Strategy(Source: www.e-future.ca)