e-business models

Encyclopedia Britannica

1768 – first encyclopedia in the English-speaking world

World’s most comprehensive and authoritative encyclopedia

Aggressive sales and marketing Target middle-income families and their aspirations for their

children 1990 sales of $650 million

Dominant market share, steady growth + generous margins Since 1990, sales have collapsed by over 80%

What happened?

Britannica viewed the CD-ROM as a toy Microsoft licensed content from Funk & Wagnalls

Third-rate content, poor quality sound and images Not serious competition (?)

Britannica’s Response

Britannica considered marketing the product on CD-ROM Britannica was too large to fit on a CD-ROM Britannica marketed text-only CD-ROM Sales force revolted because of losses in commission Bundled CD-ROM free with encyclopedia to avoid channel

conflict CD-ROM alone sold for $1,000

May 1995 – Britannica sold for half it’s book value

Britannica

Market research showed that the typical encyclopedia is opened once a year

Sales force played on parent’s anxieties about their children’s education Now a PC is the most common way of easing parental guilt

Incumbents are saddled with legacy assets Sales and distribution systems, brands, core competencies

Competing in the digital economy may mean cannibalising these assets or destroying them

Moral New Economics of Information

Evolving technological capabilities for sharing and using information can transform business definitions, industry definitions and competitive advantage e.g. Napster

IT can destroy brands and businesses Britannica’s vulnerability was due to its dependence

on the economics of intense personal selling (sales force) Implications for real estate, insurance, cars, travel

Evans and Wurster (1997) “Strategy and the New Economics of Information”, Harvard Business Review, Sept-Oct

e-Business Model Research Context MSc Research began October 2000 Dot.com “implosion” circa Spring 2000

(Howcroft, 2001) Pure-play dot.coms e.g. Boo, eToys Clicks and Mortar e.g. WorldOfFruit.com

Initially the research focused on surveying the landscape – an empirical analysis, contrast to the mainly qualitative research available at the time

Electronic Business Today

“e-commerce is no longer an alternative, but an imperative”

Landscape “confusing” for new entrants B2B segment is considerably larger [4-13 times the

size of B2C] B2B sector was expected to be worth $1.3 trillion in

2003 Coltman (2001) “hype” pre-dot.com collapse, but

new era of pessimism is an overreaction

e-Business Model “an architecture for product, service and

information flows” (Timmers, 1999) “…most discussed and least understood part of

the web” (Rappa, 2000) Ticoll et al (1998): 4 models Kaplan and Sawhney (2000): 4 models Timmers: 11 models Rappa: 30 + Osterwalder (2002) – misuse of term led to loss

of credibility of the concept

Why are e-business models important? Internet alters industry structures

Channel cannibalisation Myths that “old rules about business are obsolete”

are widespread Led to bad decisions

Move from competitive advantage based on quality, service + features to competition based only on price (Porter, 2001)

Need for appropriate e-business model so a firm can identify “where it is positioned in the value chain” (Rappa, 2003)

Boo.com: Fashion e-tailer

Strong focus on brands, not a discount seller First-mover advantage

Allowed company to raise substantial investment capital

Porter (2001) argues that this is a “myth” Launched simultaneously in a number of

territories Multiple currencies Multiple languages Varying tax-laws

Boo.com

At peak in 1999, company valued at $450m Burned $200m in 18 months

major investors were JP Morgan, Goldman Sachs, and the Benetton Family

Technology Problems required Flash plug-in, did not support Macintosh

users, required fast connection systems integration problems with logistic

partners (UPS and Deutsche Post)

Osterwalder (2002)

Linder (2001) – existing frameworks insufficient to describe array of business model choices

Osterwalder and Pigneur (2002) – e-business model ontology (formal specification of how to represent the objects, concepts and other entities that are assumed to exist and the relationships that hold among them)

What is a Business Model? (Osterwalder, 2002)

It’s the business logic of how a company makes money in a

sustainable way

HOW?

•Capabilities•Value Configuration•Partnerships

WHAT?

•Value Proposition

WHO?

•Target Customers•Channels•Customer Relationship

HOW MUCH?

•Cost Model•Revenue Model

Business Models – The Missing Link (Osterwalder, 2002)

GOALS

SYSTEMS

CEO

marketing operations finance

STRUCTURE

STRATEGYSTRATEGY

BUSINESS/ORG.BUSINESS/ORG. TECHNOLOGYTECHNOLOGY

Businessmodel

Planning Level

Architectural Level

Implementation Level

Strategy

Business Model

Business Processes

ICT Pressure

e-Business opportunities & change

e-Business process and adaptation

Business Logic Triangle (Osterwalder et al, 2002)

E-BUSINESSMODEL

1.Products and Services

2.Infrastructure and theNetwork of Partners

3.Relationship Capital

4.Financial Aspects

Value Proposition

Target Customer

Capabilities

Resources and Assets

Activity and Process Config

Partner Network

Information

Feel and Serve

Trust and Loyalty

Revenue Structure

Cost Structure

Profit Structure

PILLARS ELEMENTS

E-business model ontology (Osterwalder et al, 2002)

Business Model Decision Dynamic Environment (Mintzberg, 1979)

Uncertain Supply Chain Rapidly Changing Technology Repeated Product Evolution

Thus, organisation is unable to predict future conditions e.g. e-business model decision

“wrong choices could have dire consequences…but need to act soon or risk being left behind” (Wise and Morrison, 2000)

Simon’s (1960) 4 Phases of Decision-Making Intelligence, Design, Choice, Review

An examination of the milieu for situations in which a decision is required

…[this] phase is crucial, as alternatives not considered at this stage are very unlikely to be involved in the decision scenario at a later stage…(Pomerol, 1994)

Malone et al. (1987) argue that the ability of Information Technology to provide cheap connectivity, will result in a lowering of coordination costs, and therefore will result in a shift from hierarchies to markets

Organisational Form

Production Costs Co-ordination Costs

Markets Low High

Hierarchies High Low

Markets and Hierarchies

Models - Timmers

Models – Kaplan and Sawhney

What Businesses Buy

How Businesses Buy Operating Inputs Manufacturing Inputs

Systematic Sourcing

MRO Hubs Catalog Hubs

Spot Sourcing Yield Managers Exchanges

Open Market Alliance

Aggregation Value Chain

Low High Value Integration

Self-Organising

Hierarchical

C

ontr

ol

Models –Ticoll et al.Open Source

Supermarket Car manufacturer

High Customer Value

Complementary Scope

Control over Pricing

Defensible Sources of Revenue

Consistent Connected Activities

Unique, Inimitable Capabilities

Excellent Implementation

Sustainability for the Future

Low cost

Correct profit site

Capabilities

ScopePricing

Implementation

Activities

Revenue sources

Sustainability

Customer value

Cost

Profit site

Successful Business Model (Afuah and Tucci)

Five Forces Model (Porter, 1980)

Customer Value

Differentiation Product features, timing, location, service, product

mix, linkage between functions, linkage with other firms, reputation

Low Cost Reduction in information asymmetry Reduced transaction costs Distribution channel

Scope

Market Segments/Geographic Areas Business Market

Industry, Firm Size e.g. SME’s Households

Demographics e.g iVillage Universality property of internet facilitates expansion Firm must decide how much of the needs of the

segment it can serve

Price

Pricing strategy is crucial Knowledge-based products Market share and Margin

Giving away a product and charging fpr later versions

Giving away Product X and charging for related Product Y e.g. Adobe Acrobat

Pricing low to penetrate the market

Price

Lock-In e.g. Microsoft Windows

Switching costs Network Externalities

The more users that own them, the more valuable they are to users

Common Internet Pricing ModelsMenu (fixed) One-to-One BargainingSubscription (pay by use)AuctionReverse Auction

Other Revenue Sources include AdvertisingReferral Links

The importance of Market Share(Afuah & Tucci, p58)

The importance of Market Size(Afuah & Tucci, p59)

Revenue Sources

Selling Products Selling Product and Service Connected Activities

R&D, Marketing and Sales Value Chain (value is added to materials or

knowledge as it moves up the chain)

Synthesis of Business models

e-Business Model Characteristics

Economic Control

Items derived from Porter’s Five Forces model

5-point Likert Items (Strongly Agree….Strongly Disagree)

Manufacturing outputs in our organisation are low in asset specificity Switching costs for our customers are low

Functional Integration

Scale developed by adapting lists of functions from the modules of a leading ERP system

“Please indicate the extent to which the following are integrated with other processes and functions in the organization.”

Can “opt out” of responding to a particular item if business process/function is not relevant.

Functional Integration

5-point Likert items (Not at all Integrated, Partially Integrated, Average Integration, Highly Integrated, Completely Integrated)

Purchase Order Processing with servicing, distribution, manufacturing, planning, and financial functions. Transportation Management with servicing, manufacturing, planning, and financial functions. Material Requirements Planning with servicing, distribution, manufacturing, and financial functions.

Supply/Value Chain Integration Uses same list of functions as “Functional

Integration” construct “Please indicate the extent to which the

following are integrated with processes and functions in other firms in the supply chain (i.e. customers and suppliers).”

Capacity Requirements Planning Inventory Control Purchasing

Learning to operate different IT applications is easy for me I would have no difficulty telling others about the results of using IT

Internal Technical Innovation 25 Likert scale items (strongly disagree…strongly agree)

Constructs: relative advantage, complexity, compatability, ease of use, image, result demonstrability, visibility, trialability

External Technical Innovation Ability of the organisation to assimilate/adopt innovations

Factors: Competitive Price Intensity, Industry Concentration, Organisational structure (degree of centralisation)

5-point Likert scale (never…frequently)

How frequently does price-cutting take place in your industry In your organisation, detailed written job descriptions for employees are used

Sourcing

Identify degree of Spot and Systematic sourcing of both direct and indirect materials

Operationalising the framework

Scores from Likert items are used to give overall scores for each of the 5 organisational characteristics.

These can then be compared with the score assigned to each business model.

Methodology

Field Study 5 manufacturing companies Semi-structured interviews + administration

of scales

Case: PackCo

Economic Control

Supply Chain

Integration

Functional Integration

Internal Innovation

External Innovation

Sourcing

Score 80/150 82/144 85/156 85/125 20/34 -

Rating Medium Medium Medium Medium-High Medium Systematic

e-Business Model Characteristics

PackCo Findings

Business Model Potential for the organisation Findings from Measurement instrument

e-shop None

All Suitable

e-mall None

e-procurement Some

e-auction Some

Information Brokerage HighTrust Services SomeThird Party Marketplace High Unsuitable (Low F + SC Integration + Innovation)

e-hubs Some Unsuitable (F + SC Integration + Innovation)

Virtual Communities Some Unsuitable (F +SC Integration + Innovation)

VC Integrators Some Unsuitable (SC Integration + Innovation)

VC Service Providers Some Unsuitable (Innovation)

Collaboration Platforms None Unsuitable (F +SC Integration + Innovation)

Conclusions

Need for validation of scales through field study research in a larger number of organisations

Need for alteration of some existing scales e.g. Supply chain integration, Internal and External Innovation

Upstream and downstream issues e.g. Economic Control