Adopting appropriate ebusiness models

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Adopting appropriate e-business models
CK Farn April 2006 (Rev)
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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
• revenue sources
• And 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 sell cars.
I work for an insurance company.
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What is a business model?

• Internet disrupts our understanding presents
  new possibilities/potentialities
• new (additional) channel for procuring
  distributing goods services
• highly interactive with new capabilities

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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
  organisations core logic for creating
  valuesince 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 20002)

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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. 20027)

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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 Models
• Consider 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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Cost Structure
Revenue
High
High
Total Cost
Cost
Cost
Total Cost
Low
Low
Low
High
Low
High
Volume
Volume
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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 identification
• Which customer segment(s) do we serve? Are our
  customers organisations or end consumers?

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Customer management

• Value proposition
• Defines 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
  organiZations 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 sustainability
• Incoming 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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Financial Viability

• Costs
• Identify 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

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Financial Viability

• Risk considerations
• What assumptions are being made about revenues
  streams, costs, sales volumes? With what degree
  of uncertainty?

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Financial Viability

• 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?

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Examples of business models

• Importance of business models
• A good business model does not guarantee success
• Must be implemented via appropriate strategies
  effectively managed
• Provides a coherent framework for managers to
  think about elements of business to avoid
  overlooking elements critical to success
• Given 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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Examples of business models
Direct-to-Customer model
Place, and/or space
S
B
Communicate directly
wholesaler (Ingram books) retailer
(Wal-Mart) producer (Gillete, Nike)
individual business
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Examples of business models

• 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 portfolio
• Are an organisations goods services suited to
  selling online?

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Examples of business models

• Direct-to-Customer model
• Processes activities
• Need for excellent order fulfilment delivery
• Are new processes activities implied by the
  move online?
• Is there a risk of channel conflict as a result
  of moving online?
• Resources, capabilities, assets
• Required IT capabilities?
• Warehousing, logistics capabilities for online
  trading?

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Examples of business models

• 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 viability
• Sources of revenue (online sales, selling
  advertising space, referrals?)
• Sufficient financial resources for investments in
  IT systems integration?

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Examples of business models

• Intermediary model
• An intermediary serves to mediate transaction
  between buyer(s) and seller(s)
• Role of intermediary varies according to
  circumstances

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Examples of business models
Intermediary model
S
B
Communicate indirectly
S
B
I
B
S
Intermediaries broker / infomediary auction po
rtal B2B marketplaces
individual business
individual business
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Examples of business models

• Intermediary model
• Types of intermediaries
• Broker or infomediary
• Auctions
• Portals
• Marketplaces or hubs

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Examples of business models

• Intermediary model
• Customer management
• Understanding range of services required of
  intermediary valued by customers is essential
  to success
• Recognise potential for conflict between desires
  of buyers and needs of sellers
• Product service portfolio
• Intermediary model often involves services only
• value attached to services must be capable of
  generating a stable source of revenue

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Examples of business models

• 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, assets
• May be providing infrastructure to trading
  parties
• Must be structured to allow intermediary to
  retain control of transactions
• May require integration across organisational
  boundaries

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Examples of business models

• 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 viability
• Revenue streams from transaction fees,
  subscription fees, provision of online content,
  advertising
• Major costs stem from building robust
  infrastructure marketing
• Must achieve critical mass of buyers and sellers
  to ensure transaction volume and future viability

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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)