e - Business and

e - Business Models – Part 2[«Business and business models in the Internet»]

Higher School of Economics , Moscow 2011

www.hse.ru

Ian MilesResearch Laboratory for the Economics of Innovation, HSE

(and Manchester Institute of Innovation Research)

June 2011

The Story so far…

• In the first seminar we looked at the very first efforts to create new e-businesses, aimed at consumers and at private firms

• We considered some of the reasons for the limited success of many of these ventures, and introduced ideas like “design paradigms” and “complementary assets”

• We also considered the dot com bubble, which had the beneficial side-effect of making people think seriously about Business Models

Agenda for Today

• Basic ideas about Business MODELS• Business Model versus Business Plan• Elements of Business Models• All liberally illustrated• Begin with one case, from the dot com

bubble.

lastminute.com

“Simple idea”, readily communicated through

the name: enable people to organise

travel when they are ready to travel, not to

commit themselves long time in advance.

Cheap travel, bargains, rather than

premium travel.

With various additional “community” features.

Suppliers – hotels, airlines, theatres – often want to unload unsold tickets

Mission Statement"lastminute.com encourages

spontaneous, romantic and sometimes adventurous behaviour

by offering people the chance to live their dreams at unbeatable

prices!“

• Nothing about ethics or environment

A Brief History of lastminute.com

“We decided not to be greedy about equity but to recruit a highly talented and experienced management team by selling them a dream - a stake in lastminute.com.” and “You try to attract the best person for the job, usually far too qualified for the stage that the company is at, but you hope it will grow to accommodate them. If as founders you think you can do better than everyone else, you are in big trouble, because you never can”

Founded 1998 by Brent Hoberman (30), Martha Lane Fox (26).

They had been working for media/ telecomms strategy consultancy, Spectrum Strategy (now part of Value Partners - http://www.valuepartners.com/en/) - they were working on new business plans, internet strategy (including reports for BT).

Pitched the idea and raised >1/2 million UK £ venture capital.

Recruited very strong, experienced management team: Paul Burns (case study at http://www.palgrave.com/uploadedFiles/Lastminute.pdf ) quotes MLF as saying:

History of lastminute.com 2 – foundation to flotation

From Wikipedia

Like other dot coms, substantial marketing push.

Became highly recognised brand in UK.

Attracted many users (1/2 million by Jan. 2000)

Raised UK £ > 30 million additional investment from travel and entertainment firms, among others

Expanded into several European countries

Handled UK £ > 30 million of transactions over 1999, with income around 1% of this.

Floated in Stock Exchange at peak of internet bubble; company valued at £ > 1/2 billion; great excitement and shares shot up in value about 25%

Share prices were slipping even before the bubble really burst – traffic was growing but investments were outpacing this (e.g. new websites – by end of 2000 about 4/5 of share value was wiped out. In 2001 started shedding staff.

Up until 2005, the company had not made a net profit (after taxes) since it floated five years earlier.

History of lastminute.com 3

Shares finally purchased in 2005 for <1/2 their launch value

[still leaving the founders considerably rich]

[overvalued in the bubble!]

Brand continues – success story of a sort. Travel industry overall faced problems.

Survival through the boom-and-bust:

• did have a first-mover advantage on a smart business idea; acquired many (potential) competitors across Europe; marketing did build brand recognition and recruited many users

• good links with supply chain, offering an attractive deal to travel companies, etc.

• continuing innovation in web offerings.

PCPro, May 2005

History of lastminute.com 4

BBC coverage in 2005:

“by the time the dot.com bubble had well and truly burst, Lastminute had already crossed the line from tech start-up to retailer - an altogether more solid sector.”Henk Potts of Barclays Stockbrokers told Sunday Express said it was unlikely the City would mourn its departure.

Meanwhile Hilary Cook of Barclays Stockbrokers said it marked "the end of an era…"

http://news.bbc.co.uk/2/hi/business/4697239.stm

"When it first floated it had the turnover of a couple of pubs but was valued at more than WH Smith. That showed how far market valuations got out of kilter."

" Lastminute symbolised the dot.com boom and proved that not all dot.com businesses were rubbish - so many based their success on the number of hits they got," "It proved it had a business model that could make money, and make money for its investors - which in the end enabled it to sell itself for a decent sum of money."

A dot com Business Model

• Building a large user base and strong supply chain links to establish brand and market presence, sufficient to reduce competitive threats.

• Acquiring capabilities to manage the service through initial growth to more “mature” operation.

• Celebrated in media, and even criticism from environmentalists generated publicity.

• But a very long haul to become profitable.

David Teece on Business Models

• Often BM is seen as how you make money • David Teece (again): “how a firm delivers value to customers, entices customers to make payments, and converts customers payments to profits” paper in Long Range Planning, but see powerpoints at: http://businessinnovation.berkeley.edu/teece/Business_Models_Business_Strategy_and_Innovation.pptx•“A business model reflects management’s hypothesis about what customers want, how they want it, and how the enterprise can organize to best meet those needs, get paid for doing so, and make a profit.”

dot com fever → Business Model Fever

• Often BM is seen as how you make money • Here is the basic idea from the BUSINESS MODELS ON THE WEB page by Michael Rappa, at http://digitalenterprise.org/models/models.html

The offering (value proposition) and the “revenue model” are important parts, but not only part of the Business Model•And why a “model”,

anyway?

Model

• A mental representation, a set of hypotheses• May be codified (written down), but more

important to share and use for guidance• Will typically be modified by cruel reality• What are the key elements? commentators vary

in the number they propose, see essays in Long-Range Planning June 2010

• Can thinking about Business Modelsbe helpful for business planning and

analysis?

Elements of a Business Model

Organisational Vision

Source: Liting Liang 2010 (DPhil thesis) –She studied low-cost airlines as examples of innovation in business models.

We will return to this laterWe will return to this later

Higher School of Economics, June 2011

Model versus Strategy?

• Much like Strategy: plan to align firm with opportunities and threats in its environment – may be several business strategies within one overarching corporate strategy (Ansoff, Andrews)

Higher School of Economics, June 2011

Business Model is NOT a Business Plan

Business Plan Business ModelWritten down on paper to convince investors: a SELLING job [though preparing this can be very instructive]

May be partly written [e.g. For visualisation], but largely tacit and shared mental model to coordinate partners

Formalised (one looks much like another): a set of guesses about opportunities and risks, with justifications where possible.

Appraisal of how different “building blocks” can be aligned, under what circumstances.*

Justifies action by providing an account of how business and its markets should evolve.

Prompts analysis of where actions are required to fulfil (or modify) ambitions.

Does it sell the firm to investors? Does it guide action effectively, and can it be revised when needed?

* This terminology from Steve Blank, who has good presentations at http://www.steveblank.com

Standard Business Plan

• Headline: what return on investment, when.• How will investment, expenditure, profit evolve over

time (1 year, 5 years).• Establish this set of guesses in terms of claims

(backed as far as possible by evidence, e.g. market research) about:– Markets, marketing, delivery of the service, sales– Development costs and risks– Competitors and collaborators– Etc.

Typically:

Word document, backed by Excel

spreadsheets

Services helping with Business Planshtt

p://

ww

w.b

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m/s

ampl

e_bu

sine

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lans

.cfm

BPlan gives away some basic advicehtt

p://

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bpla

ns.c

om/w

riting

-a-b

usin

ess-

plan

/a-s

tand

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busi

ness

-pla

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tline

Is this a simple Freemium service, or marketing via display of competence?

Business Plan is NOT a Business Model

Business Plan Business ModelWritten down on paper to convince investors: a SELLING job [though preparing this can be very instructive]

May be partly written [e.g. For visualisation], but largely tacit and shared mental model to coordinate partners

Formalised (one looks much like another): a set of guesses about opportunities and risks, with justifications where possible.

Appraisal of how different “building blocks” can be aligned, under what circumstances.*

Justifies action by providing an account of how business and its markets should evolve.

Prompts analysis of where actions are required to fulfil (or modify) ambitions.

Does it sell the firm to investors? Does it guide action effectively, and can it be revised when needed?

What benefits are we delivering?

How are they made available to our consumers/clients?

How are we creating them?

Who is helping us create them?

What are the resources and capabilities we need to do these things?

How are we balancing the books and making a profit?

A series of points where we need to take action, to monitor developments, to appraise competitors, customers,

partners…

Elements of a Business Model

Organisational Vision

This is one view of the key elements from Liting Liang 2011 (DPhil thesis) –She studied low-cost airlines as examples of innovation in business models.

“Building blocks” need to be aligned, though tension can be

creative

“Building blocks” need to be aligned, though tension can be

creative

Higher School of Economics, June 2011

e- and Business Models

• The models may be different, but the elements or building blocks are essentially the same.

• Much of the recent discussion of Business Models, however, focuses on cases of relatively conventional businesses, though with some e-features thrown in.

• Perhaps this reflects the fear that many e-business models are, as the bubble showed, not really sustainable, not the great models for the rest of us that were claimed.

• Still a focus on disruptive innovators!

Disruptive Innovators

Clayton Christensen:a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market’, eventually displacing established competitors.

Initially focused on disruptive technology – but then new business models

http://www.claytonchristensen.com/disruptive_innovation.html

Disruptive Innovation: Low Cost Airlines

Clayton Christensen:over time performance improvements tend to outstrip customers' ability to absorb those improvements. This results in "overshoot," companies offering new attributes for which customers are increasingly unwilling to pay premium prices. When this occurs, a disrupter can gain a foothold with a new product that makes consumption cheaper and easier for these overshot customers.

http://www.forbes.com/2009/06/15/southwest-apex-learning-personal-finance-clayton-christensen-innovation-airlines.html

Disruptive innovation must expand markets by targeting (a) non-users (who cannot afford the standard product) or (b) appeal to users who are overserved by very high “quality” products. The disruptor will typically have and exploit resources and capabilities the incumbent lacks, or discounts. The disruptor will typically be using new value chains, or new influences on value chains.

low-cost, no-frills flights aimed at

leisure travelers – but began to

attract business passengers too

Are you disruptive? In a niche?

• Christensen says this is the way to beat incumbents• Otherwise you may well remain in a niche• This may well be what you want to do• But niches can be attacked too.• Is the niche a community where people can cross-

refer your service, or is it isolated individuals?• Why does the niche exist – particularly demanding

requirements, even innovative consumers (ho may be the vanguard)

• A niche can be a test-bed, a lead market.

Offering what to whom?

PRODUCTS NEW

Novelty

FAMILIAR

MARKETS ESTABLISHED / FREQUENT NEW/RARE Users

In a niche

From niche to

mass

Turning customers

on to novelty

Elements of Business Models

• The models may be different, but the elements or building blocks are essentially the same.

• This applies to e-Business as well as conventional business.

Elements of a Business Model

Organisational Vision

This is one view of the key elements from Liting Liang 2011 (DPhil thesis) –She studied low-cost airlines as examples of innovation in business models.

“Building blocks” need to be aligned, though tension can be

creative

“Building blocks” need to be aligned, though tension can be

creative

Higher School of Economics, June 2011

Elements of a Business Model

Organisational Vision

Organisational VisionOrganisational Vision

Definition: Strategic intent - what the desired future of the firm will be, what opportunities are to be seized (the business model should flow from this).Example: To be the leading source of news/gossip/reviews...Innovation: To be the leading online portal for news/gossip/reviews...A new vision of what the rules of the game could be.

Note that this definition is from the supplier side, and do NOT pay enough attention to customer resources, co-creation of value and the like.

Note that this definition is from the supplier side, and do NOT pay enough attention to customer resources, co-creation of value and the like.

Higher School of Economics, June 2011

Vision

• “eBay Inc. pioneers communities built on commerce, sustained by trust, and inspired by opportunity. eBay brings together millions of people every day on a local, national and international basis through an array of websites that focus on commerce, payments and communications”http://pages.ebay.com/aboutebay/thecompany/companyoverview.htmlearlier: “"eBay's mission is to provide a global trading platform where practically anyone can trade practically anything."

• Real aim: To be the leading online auction site in the world?• Founded 1995; in over 30 countries (and global); $multibillion,

hundreds of thousands of new auctions daily. Dominates the scene. Why? Business Model elements aligned… plus timing, complementary assets, and luck.

• →eBusiness Model: AUCTION (subset of MARKETPLACE- indeed describes itself as “the World’s Online Marketplace” TM)

Two eBays

Another Bubble Survivor/Success Story

• Indeed, at one time this was hailed as the great survivor• Profitable almost from outset• Rapidly moved beyond niche of collectors.• Acquired several competitors, expanded globally• Innovative, introducing new selling mechanisms (“but it now”, shops, etc).• Its users do much of the work (storing, packaging, posting, etc.), and other parts of

supply chain also externalised (e.g. PayPal)eBay provides only technology platforms and tools for e-commerce and does not have inventory like Amazon, a leading e-commerce retailer. As a result, eBay is a highly profitable company with a roughly a 17% operating margin,[1]in comparison to Amazon, whose operating margin is roughly 5%.[2] As an e-commerce company with significant international presence, broad product category offerings, and many different technology platforms … eBay attracts a lot of competition…. The company's growth rate has slowed since its early years as the company faces fierce competition, changes in customer behavior and expectations, and high levels of real and perceived fraud. eBay's success going forward depends on its ability to respond to growing buyer and seller dissatisfaction - http://www.wikinvest.com/stock/EBay_%28EBAY%29#Trends_and_Forces

founded in 1995 now “more than 90 million users worldwide, trading more than $1,900 worth of goods each second”

The Vision may evolve

• You may find yourself with very different ambitions after a period in practice (e.g. move from ‘number 1” to “an excellent” firm.

• In any case, over time you will need to rethink at least some of the elements of your BM in the light of experience.

• What you need at launch, when you are floating, when you are scaling up, when the markets change… will be in many ways different things.

In the Next Lectures

• We will examine the elements of the Business Model in more detail, illustrating with examples from a range of e-Businesses.

• We shall pay particular attention to financing issues.

• We will think about the different types of e-Business Model.

• Can you design a Business Model?• How do we confront the inevitability of

change?

20, Myasnitskaya str., Moscow, Russia, 101000Tel.: +7 (495) 621-2873, Fax: +7 (495) 625-0367

www.hse.ru

Higher School of Economics, June 2011