e business part 4 of 4
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Fourth and final lecture to students in Business Informatics dep-artment at Higher School of Economics, MoscowTRANSCRIPT
e - Business and
e - Business Models – Part 4[«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 two lectures we looked at early efforts to create new e-businesses, and ideas to help us understand the limited success of many of these ventures; the dot com bubble, which had the beneficial side-effect of making people think seriously about Business Models.
• We explored differences between Business Models and Business Plans, and considered some elements of Business Models.
• In the third lecture we began working through these elements: today we conclude doing this.
Elements of a Business ModelInspired by Liting Liang 2011 (DPhil thesis) ,studying low-cost airlines as innovative business models.
But the emergence of the Web (and web2.0) and new media platforms means new approaches possible in all the hexagons.
“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
Value Proposition
Economic Formula
Organisational Vision
Position in Value
Network
Target Market
Value Chain
Structure
Resources and
Capabilities
4 – Economic Formula
Value Chain Structure
Position in Value
Network
Economic FormulaEconomic Formula
Definition: revenue model and cost structure: how firm incurs expenses and how it gains income.Example: consumer pays for media content, firm produces or buys it.Innovation: consumer contributes media content, service paid for by advertisers.Changed cost structure, new sources of revenue.
Definition: revenue model and cost structure: how firm incurs expenses and how it gains income.Example: consumer pays for media content, firm produces or buys it.Innovation: consumer contributes media content, service paid for by advertisers.Changed cost structure, new sources of revenue.
Higher School of Economics, June 2011
Value Proposition
Economic
Formula
Organisational Vision
Position in Value
Network
Target Market
Value Chain
Structure
Resources and
Capabilities
Income
• Balancing what we earn with what we spend.• How we earn is our revenue model. For many
people, this is the key element of a Business Model.
• At the outset, the major source of income may actually be investment, e.g. from venture capital. (This often gets neglected.)
Economic
Formula
Getting Investment
• This is where you need a Business Plan, as discussed before!
• Venture capital: funds for “early-stage, high-potential, high risk, growth start-ups”, for 2-7 years or so, in return for equity [More equity needed to convince most venture capitalists to invest, the earlier the investment stage.] ($1-10 millions)
• Business angels – invest own money in return for equity. Limited funding by comparison with VC; often sell on to VC. ($100,000 upwards)
• Regular loans from banks etc. (No risk)• Public funds? Regional bodies, R&D funders, etc.• New approaches? Crowdfunding?“ ” Definition derived from Wikipedia: http://en.wikipedia.org/wiki/Venture_capital
Crowdfunding
•http://www.microventures.com/
From an article on Crowdfunding on Entrepreneur athttp://www.entrepreneur.com/article/219735
MicofinanceOften social entrepreneurs: check out
http://peerbackers.com/
Investment in Russia
• Many resources on raising investment, but unsure of relevance to Russia.
• There are some Russia-oriented discussions though.
• Conferences/trade shows seem to often have investment discussions attached.
http://www.ambarclub.org/node/246
So you have funded your start-up
• At some point you are going to have to start paying for operations
• Unless you are living in a bubble that just keeps inflating
• In which case the best idea is to know when to get out!
• But knowing when to get out is a rather important skill anyway: running the same business forever is not to everyone’s taste; nor is running a big business.
Geeting regular income: remember Rappa’s list of e-Business Models
More detail on e-Business Model types from Rappa
http
://d
igita
lent
erpr
ise.
org/
mod
els/
mod
els.
htm
l
“Monetising” your website/service• Is the online resource the source of income, or something else?
– E.g. consultancy, web design: the website is then an advertisement for you, or an e-commerce (retail) site. Possibly different layers of service.
• WHO is paying?– Is it the audience for your website?– Or a third party
• Advertisers• People who want to have content distributed (sponsors)• People who can use information you are collecting (addresses, survey responses)
• HOW are they paying?– On the basis of usage
• Which resources? (premium content? Associated e-books, graphics…)• Whose usage?• Usage= access to information? Delivery of service?
– On a license/membership fee basis?– As a service charge (e.g. fee related to transactions)?– Donations, other models.
Most online sites begin free
• Or else have striking value propositions…• …often supported by free content anyway.• Attract large audiences (if you are lucky – or
have a good plan), retain them (this means rich content and/or continuous input, or else a service they will often want to reuse like a game, drawing tool, translation engine…)
What value proposition monetised?• Is the online resource the source of income, or something else?
– E.g. consultancy, web design: the website is then an advertisement for you , or an e-commerce (retail) site. Possibly different layers of service.
• WHO is paying?– Is it the audience for your website?– Or a third party
• Advertisers• People who want to have content distributed (sponsors)• People who can use information you are collecting (addresses, survey responses)
• HOW are they paying?– On the basis of usage
• Which resources? (premium content? Associated e-books, graphics…)• Whose usage?• Usage= access to information? Delivery of service?
– On a license/membership fee basis?– As a service charge (e.g. fee related to transactions)?– Donations, other models.
What service offering?
How far the website marketing some service you want to sell
How far the website offers useful content
or service of value to users
Related services
Premium services
Vanity projects A shop
“Free” services
Paid-for content
Advertising
Selling an e-book
Do you sell it yourself directly, or through a merchant? Do you use PayPal (etc.)?
What market monetised?• Is the online resource the source of income, or something else?
– E.g. consultancy, web design: the website is then an advertisement for you, or an e-commerce (retail) site. Possibly different layers of service.
• WHO is paying?– Is it the audience for your website?– Or a third party
• Advertisers• People who want to have content distributed (sponsors)• People who can use information you are collecting (addresses, survey
responses)• HOW are they paying?
– On the basis of usage• Which resources? (premium content? Associated e-books, graphics…)• Whose usage?• Usage= access to information? Delivery of service?
– On a license/membership fee basis?– As a service charge (e.g. fee related to transactions)?– Donations, other models.
What market monetised?Advertisers pay Facebook to target niches
Feedback on clicks, on clicker demograph-ics
Sponsors
Content that they have an interest in promoting: may also sponsor services
User/usage Information
• Can we sell a service, even with privacy guarantees?
• Many sites do not give these guarantees (and are guaranteed to generate spam)
User Informaton
• This is an area beset with ethical concerns, even with opt-out, opt-in possibilities
• Likewise reselling content provided by users• Much discussion on web, action taken by
Facebook against app developers, etc.
What revenue mechanism?• Is the online resource the source of income, or something else?
– E.g. consultancy, web design: the website is then an advertisement for you , or an e-commerce (retail) site. Possibly different layers of service.
• WHO is paying?– Is it the audience for your website?– Or a third party
• Advertisers• People who want to have content distributed (sponsors)• People who can use information you are collecting (addresses, survey responses)
• HOW are they paying?– On the basis of usage
• Which resources? (premium content? Associated e-books, graphics…)• Whose usage?• Usage= access to information? Delivery of service?
– On a license/membership fee basis?– As a service charge (e.g. fee related to transactions)?– Donations, other models.
Freemium
http://www.surveymonkey.com/
Increasing number of questions, responses, templates,
sophistication of structure…
Allegedly the most common model, with a
conversion rate of a few per cent
Usage Basedhttp://www.invideous.com/
Pay-per-view: live event
http://us.blizzard.com/blizzcon/en/event-info/virtual-ticket
Subscription
Subscription– not just for content
Multiple revenuesAdvertisers pay www.Textlinkads.com flat rate for 30 days (not per click) – based on algorithm about website characterisics.Publishers paid 50% of this (various methods - cheques, PayPal, to a credit card).
What revenue mechanism?• Is the online resource the source of income, or something else?
– E.g. consultancy, web design: the website is then an advertisement for you , or an e-commerce (retail) site. Possibly different layers of service.
• WHO is paying?– Is it the audience for your website?– Or a third party
• Advertisers• People who want to have content distributed (sponsors)• People who can use information you are collecting (addresses, survey responses)
• HOW are they paying? And how are you collecting the money?– On the basis of usage
• Which resources? (premium content? Associated e-books, graphics…)• Whose usage?• Usage= access to information? Delivery of service?
– On a license/membership fee basis?– As a service charge (e.g. fee related to transactions)?– Donations, other models.
Take Cards
• Take credit or debit cards: become a merchant yourself– You need a secure server to handle confidential information (credit card
numbers and related details) without risking it being captured and used fraudulently by someone else. Encryption.
– You need to display certificates showing you are secure!
• Take cash or cheques, via mail or F2F
• Some commentators advise you to always have several payment options: buyers have their own preferred modes
• User 3rd party services
3rd-party payment services is well-known, but there are many alternatives.
5 - Value Chain Structure
Position in Value
Network
Value Chain StructureValue Chain Structure
Definition: the organisation of the units that add value to various steps in production and deliveryExample: traditional organisation of media content industries, from (in-house) creators through packagers to distributors. Innovation: disintermediation; outsourcing or offshoring key professional services to other business partners.Redesign of value production and/or delivery activities.
Definition: the organisation of the units that add value to various steps in production and deliveryExample: traditional organisation of media content industries, from (in-house) creators through packagers to distributors. Innovation: disintermediation; outsourcing or offshoring key professional services to other business partners.Redesign of value production and/or delivery activities.
Higher School of Economics, June 2011
Value Proposition
Economic Formula
Organisational Vision
Position in Value
Network
Target Market
Value Chain
Structure
Resources and
Capabilities
Steps in Value Chain• Highly Simplified
Representation• Lots of arrows link
these elements, many feedback loops possible.
• Another Michael Porter Idea/ Label
• Firm-level – • Or Industry level: then
the issue arises of vertical integration and/or intermediation End-Users
Producers of “Raw Materials”
Processors of “Raw Materials”Producers of
Equipment
Transport ServicesWholesalers
Retailers
Manufacturers
PackagersInfrastructure
Support Activities for Producers and
Users
• Porter Value-Chain analysis: identify key activities in VC; assess the potential for adding value via cost advantage or differentiation, or where there are problems; strategic focus on activities with potential to sustain competitive advantage
E-Business Value Chain
• View e-business as substituting virtual for physical steps in a VC (or introducing a new activity with major virtual VC steps – maybe completely!).
• Sometimes hard to abolish physical steps: e.g. Amazon has huge investments in warehouses, distribution – even though trying for e-book sales electronically.
Another Simple View• Highly Simplified
Representation• Lots of arrows link
these elements, many feedback loops possible.
• Another Michael Porter Idea/ Label
• Firm-level – • Or Industry level: then
the issue arises of vertical integration and/or intermediation End-Users
Producers of “Raw Materials”
Processors of “Raw Materials”Producers of
Equipment
Transport ServicesWholesalers
Retailers
Manufacturers
PackagersInfrastructure
Support Activities for Producers and
Users
• Porter Value-Chain analysis: identify key activities in VC; assess the potential for adding value via cost advantage or differentiation, or where there are problems; strategic focus on activities with potential to sustain competitive advantage
Who are your suppliers?
Who provides your back office?
Who provides your front office?
Who are your customers and
what do they do?
What is the broader support
system:
e.g. ISP, web host, payment,
fulfilment services?
Business Models from Value Chain analysis
• Here is an effort to classify BMs from a VC perspective, by Zeng and Huang, at
• http://www.mgmt.uestc.edu.cn/Meeting/4ebiz/documents/word_pdf/session%205/5-3%20presenter%20zeng%20qingfeng.pdf
Fulfilment Services
6 - Position in Value Network
Value Chain Structure
Position in Value NetworkPosition in Value Network
Definition: how the firm interacts with stakeholders and locates itself in the system of production.Example: firm chooses how far to specialise in one or other location in value network.Innovation: customer roles changed, e.g. feedback sought, viral marketing, new CRM systems.Changed relationships with suppliers, competitors, customers; work with new stakeholders.
Definition: how the firm interacts with stakeholders and locates itself in the system of production.Example: firm chooses how far to specialise in one or other location in value network.Innovation: customer roles changed, e.g. feedback sought, viral marketing, new CRM systems.Changed relationships with suppliers, competitors, customers; work with new stakeholders.
Higher School of Economics, June 2011
Value Proposition
Economic Formula
Organisational Vision
Target Market
Value Chain
Structure
Resources and
Capabilities
Position in Value Network
Position in Value Chain
• Where you locate and• How you locate!• In particular, how you relate to clients, supliers,
business partners.• In many e-business these may be shifting roles:
– Across different projects– With same actors playing multiple roles: especially
customers as co-producers.– “customers” may be “prosumers” and create service for
others – shape the service experience.– Many e-businesses seek to mobilise customers as viral
advertisers, as content providers, as beta-testers, and more.
Analysis of your Business Model
What are you selling?
To whom?
Using what resources in what activities?
Spending what, and being paid what?
Who are your key partners?
What are your key relationships,
how are they organised?
Higher School of Economics, June 2011
Value Proposition
Economic Formula
Organisational Vision
Position in Value
Network
Target Market
Value Chain
Structure
Resources and
Capabilities
Think systematically through them
• One leading figure here is Alexander Osterwalder: he wrote a thesis [2004] on designing Business Models (at http://www.hec.unil.ch/aosterwa/PhD/Osterwalder_PhD_BM_Ontology.pdf )
• In his version there are 9 building blocks, which he organises into a design template- you can describe your model and hopefully see where there are misalignments:
Osterwalder’s template
Infrastructure: 1 Key Activities needed to execute the BM.
2 Key Resources needed to create value for the customer.
3 Partner Network needed for alliances to perform business.
Offering: 4 Value Proposition: what services represent value for specific customer segments, and differentiates your USP from competitors.
Customers: 5 Customer Segments: the target market for your services.
6 Channels: how products and services are delivered to customers; marketing and distribution methods.
7 Customer Relationship: links with various customer segments.
Finances: 8 Cost Structure: expenses are incurred in undertaking activities.
9 Revenue Streams: what income is generated, and how captured.
Key Questions - 1
• Inspired by Osterwalder; see http://www.businessmodelgeneration.com/downloads/business_model_canvas_poster.pdf
• You have to iterate, since answers are independent
• Value Proposition:– What value does the service provide the customer?– What needs are addressed: what problems are we
helping to solve and/or what experiences are we trying to provide?
– What service bundles are being offered to specific Customer Segments?
This makes us think about attributes like customisation vs. standardisation, novelty vs. familiarity, low-cost versus high-quality (or freemium model), user expertise, design features, etc. Consider: what are the risks? How to manage them?
Key BM Questions - 2
• Combining Osterwalder and Liang frameworks:
• Target Market/Customer Segments:– Who are the intended customers?– Are they the end-users of the service?– Are there other users of the service or related
services, for whom we are creating value?– Who are the most critical customers (in both senses
of the word “critical”)?– Revenue streams?
This makes us think about attributes like whether this is a Mass or Niche Market (or some combination), whether market segments differ considerably in taste and behaviour, speed of adoption, etc. Consider: what are the risks? How to manage them?
Key BM Questions - 3
• Key Activities/ Resources/ Capabilities: What do we have, and what are needed for achieving the – Value Proposition(s)?– Distribution Channel(s)?– Customer Relationship(s)?– Revenue streams?
This makes us think about attributes like organising and scheduling of production, delivery, payments; about the reliability of infrastructure and staff, etc. Link to next question on costs. Consider: what are the risks? How to manage them?
Key BM Questions - 4
• Economic Formula - Key Costs/ Revenues: – What expenses are incurred by our main resources
and activities?– Can the costs be reduced by efficiency, outsourcing,
etc.?– What are the customers willing to pay, and how?– What are the contributions of different revenue
streams?This makes us think about attributes like modes of pricing (fixed vs dynamic charging; fixed vs variable costs) of charging (licensing, -per use, share of fees, etc.), how far there are economies of scale, of scope etc.
Consider: what are the risks? How to manage them?
Key BM Questions - 5
• Value Chain structure/ Key Partners: – Who are our Key Partners and suppliers?– What is the division of labour, and how flexible is it?– What Key Resources do which partners provide?– Which Key Activities do which partners perform?
This makes us think about the motivations for partnership – as opposed to vertical integration, arm’s length contracting, etc.
Consider: what are the risks? How to manage them?
Key BM Questions - 6
• Position in Value Network/ Customer Relationships and Channels: – What type of relationship do various Customer Segments
expect from us, immediately and ongoing?– How costly are they?– Through which Channels should Customers (Segments) be
reached (what do they want, what are they used to, what can we do)?
– Can we better integrate them with customer routines (more uptake/loyalty)?
– If multiple channels: How are our Channels integrated?– Which are most effective, which most cost-efficient?
This makes us think about features like customer cocreation of service and value; customer reinvention (*!); communities; before- and aftersales relations (marketing, helpline and similar aids) , etc. Consider: what are the risks? How to manage them?
http://www.businessmodelgeneration.com/canvas
How to answer BM questions
• You can do it late in the night sitting at a desk• Or you can work in a group, putting post-its
onto large posters, discussing and ranking topics.
The latter is good for sharing and developing ideas, assessing risks…
The big question: do they all fit together well?
Business Model Questions (Teece)
Figure 3 in D. Teece, “Business Models, Business Strategy and Innovation”, Long Range Planning, 2010Illustration downloaded from a great presentation at:
http://businessinnovation.berkeley.edu/teece/Business_Models_Business_Strategy_and_Innovation.pptx
Thinking about Business Models
• Demonstrates that there are many forms of e-Business
• That they are evolving rapidly as people develop and seize new opportunities
• Provides perspective on just what it is that we are offering and how we need to realise our ambitions
• And tells us about what to watch out for!
20, Myasnitskaya str., Moscow, Russia, 101000Tel.: +7 (495) 621-2873, Fax: +7 (495) 625-0367
www.hse.ru
Higher School of Economics, June 2011