chapter 2 adopting appropriate e-business models
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Chapter 2
Adopting appropriate e-business models
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Learning objectives
What constitutes a business model
Why understanding and articulating a business model is vital to an organisation achieving profitability and sustainability
The essential components of a business model, and some generic business models
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Learning objectives
How managers can use business models and the implications of business models for managerial decision making and action taking
The relationship between business models and organisational strategy
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Introduction
Internet (& associated technologies) form foundation of global communication & information infrastructure
transforming industries & changing way business is conducted
need to investigate new models of business that effectively utilize potentiality of Internet & associated technologies
“gold rush”mentality of mid-late 1990s serious search for frameworks/models to analyze & define e-commerce landscape
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What is a business model?
A business model is a description of how a business works
its value chain, process interactions, cost structure, and revenue sources, how it will achieve profitability and sustainability.
BUT the term ‘business model’ is becoming a buzzword,and thus routinely misappropriated
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What is a business model?
Why focus on business models?traditional, industrial age concept of how business 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.
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Internet “disrupts” our understanding & presents new possibilities/potentialities
new (additional) channel for procuring & distributing goods & services
highly interactive with new capabilities
What is a business model?
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What is a business model?
new business models needed to shape business practices in new business environment
Value proposition (value delivered to customers), capabilities, sources of costs & revenues are generally less familiar & obvious, & therefore need further analysis & articulation
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What is a business model?
Business models defined…“an operating business model is the organisation’s core logic for creating value…since organisations compete for customers & resources, a good business model highlights the distinctive activities and approaches that enable the firm to succeed – to attract customers, employees, and investors, and to deliver goods & services profitably.”
(Linder & Cantrell 2000:2)
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What is a business model?
Business Model defined… “a business model is nothing else than the
architecture of a form and its network of partners for creating, marketing and delivering value & relationship capital to one or several segments of customers, in order to generate profitable and sustainable revenue streams”
(Dubosson-Torbay et al. 2002:7)
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What is a business model?
Function of Business Models Articulate value proposition
Value created for customers by goods/services (via use of technology)
Identify market segment
Define structure of internal value chain required to create & dist8ribute offering
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What is a business model?
Function of Business ModelsConsider cost structure and profit potential, given value proposition and value chain structure
Describe position of firm within value network
Formulate competitive strategy
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What is a business model?
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Customer management
Embraces a number of aspects associated with customers & relationships that organisation maintains with customers
Customer identificationWhich customer segment(s) do we serve? Are our customers organisations or end consumers?
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Customer management
Value propositionDefines & describes the value an organisation delivers to its customers
Stems from perceptions of customers as to what is important
Understanding & servicing customer requirements
Developing brand awareness
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Product & service portfolio
What portfolio of products and/or services and/or experiences does an organisation offer its customers?
Broad or narrow range?Stand-alone or tightly integrated?
Where on the product lifecycle are an organiZation’s products, services and experiences?
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Product & service portfolio
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Product Portfolios
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Processes & activities
What core business processes and activities does an organisation require in order to deliver the value proposition to its customers?
How should a business be configured?
Do these processes and activities imply a need to develop external linkages to ensure delivery of value proposition, or can/should they be performed internally?
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Resources, capabilities & assets
What resources, capabilities, assets do we need to deliver value proposition?
In-house or outsource?
How do we recruit & train human resources needed for success?
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Suppliers & Business Networks
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Suppliers and Business Networks
Do we need close relationships with other organisations in order to deliver the value proposition to customers?
How to find & manage the resultant strategic business network (SBN)?
Will SBN enhance our ability to be responsive, flexible, agile in changing & competitive environment?
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Financial Viability
Profitability & sustainabilityIncoming revenues must exceed costs over time
Typically costs are incurred before revenues are received
Challenge is to manage cash flows to ensure sustainability
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Financial Viability
Sources of revenues?Selling goods, services
Selling advertising space, sponsorship
Commissions, subscription fees
When will revenues be generated?How moneys apportioned across SBN?
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CostsIdentify total costs (all costs associated with design, developments and/or procurement of goods & services, and all costs incurred in delivering on value proposition of customers)
Where are costs incurred?
Understanding costs is essential to establishing pricing mechanisms & policies
Financial Viability
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Financial Viability
Risk considerationsWhat assumptions are being made about revenues streams, costs, sales volumes? With what degree of uncertainty?
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Established price customers are willing to pay?
When are goods / services expected to be profitable?
Have all costs been identified? All revenues? Opportunities to leverage knowledge, technology or physical assets?
Has risk been considered?
Financial Viability
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Examples of business models
Importance of business modelsA good business model does not guarantee successMust be implemented via appropriate strategies & effectively managedProvides a coherent framework for managers to think about elements of business & to avoid overlooking elements critical to successGiven 6 elements, there are many ways of combining these to form organisational blueprints
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Examples of business models
Direct-to-Customer model Basis of commercial transactions over the Internet
Describes process of selling direct to customer via organisational website
Incorporates both supply-oriented transactions (organisation is in role of buyer) & demand-oriented transactions (organisation is in role of seller)
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Place, and/or space
Communicate directly
* individual* business
* wholesaler (Ingram books)* retailer (Wal-Mart)* producer (Gillete, Nike)
S B
Examples of business models
Direct-to-Customer model
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Direct-to-Customer model Customer management
Does moving online increase potential market, or does it cannibalise existing market?
Does online service increase satisfaction & loyalty?
What is the customer value proposition? How is it enhanced or supported through moving online?
Product & service portfolioAre an organisation’s goods & services suited to selling online?
Examples of business models
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Direct-to-Customer model Processes & activities
Need for excellent order fulfilment & deliveryAre new processes & activities implied by the move online?Is there a risk of channel conflict as a result of moving online?
Resources, capabilities, assetsRequired IT capabilities?Warehousing, logistics capabilities for online trading?
Examples of business models
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Direct-to-Customer model Suppliers & business networks
Alliances needed with external providers of components of the value proposition?
Skills needed to form and manage relationships?
Financial viabilitySources of revenue (online sales, selling advertising space, referrals?)
Sufficient financial resources for investments in IT & systems integration?
Examples of business models
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Intermediary model An intermediary serves to mediate transaction between buyer(s) and seller(s)
Role of intermediary varies according to circumstances
Examples of business models
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Communicate indirectly
* individual* business
S B
Examples of business models
I
* individual* business
Intermediaries:*broker / infomediary
*auction*portal
*B2B marketplaces
B
B
S
S
Intermediary model
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Intermediary model Types of intermediaries
Broker or infomediary
Auctions
Portals
Marketplaces or hubs
Examples of business models
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Intermediary model Customer management
Understanding range of services required of intermediary & valued by customers is essential to successRecognise potential for conflict between desires of buyers and needs of sellers
Product & service portfolioIntermediary model often involves services only‘value’ attached to services must be capable of generating a stable source of revenue
Examples of business models
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Intermediary model Processes & activities
Need for excellence in gathering and managing information & knowledge (about buyers & sellers requirements, about industry, about range of products & services, etc)Excellence in integrating processes of buyers and sellers required
Resources, capabilities, assetsMay be providing infrastructure to trading partiesMust be structured to allow intermediary to retain control of transactionsMay require integration across organisational boundaries
Examples of business models
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Intermediary model Suppliers & business networks
May require extensive use of business networks & alliances (e.g. portals)Need to make decisions about which services provided internally as opposed to external providers
Financial viabilityRevenue streams from transaction fees, subscription fees, provision of online content, advertisingMajor costs stem from building robust infrastructure & marketingMust achieve critical mass of buyers and sellers to ensure transaction volume and future viability
Examples of business models
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Examples of business models
Content Provider model provides content based on expertise, on-sold to third parties, or made available free of charge (e.g. weather forecasts, news)
Revenues generated through sales of content, or through selling advertising space on popular sites
often a variant of Direct-to-Customer model
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Implications for managers
Simple framework of business models helpful for enhancing understanding and dialogue among managers
Serves to align organisational members to organisational mission
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Implications for managers
Sound, coherent, articulated business model essential for any business
Must be complemented by strategy that takes into account competition, industry forces & the like
Business model defines what an organisation is all about, what is does, how it makes money
Strategy articulates how it will achieve goals and targets
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Implications for managers
But…
Different researchers & writers do not always approach the concept of a business model in a similar way…
Consider the views of:Harvard Business School (Applegate)
Aust. Graduate School of Management (Weill & Vitale)
Gartner group (Taylor & Terhune)
Eisenmann (Harvard – 2002)