Viable Internet Business Models

1
Viable Internet Business Models

• After the Gold Rush
• Clayton Christenson

2
The Overview

• Disruptive vs. sustaining technology models
• Cramming vs. enabling models
• Prevailing basis of competition model
• What future for portals? Why?

After the Gold Rush, Clayton Christensen,
Innosight, 2000
3
The Internet as Disruptive or Sustaining
Technology

• Sustaining Technology
• Targets existing profitable customers
• Generally improves gross margins
• Improves performance along a trajectory
  traditionally valued by existing customers
• Can be incremental or radical in nature

• Disruptive Technology
• Targets new customers in new ways
• Generally lowers gross margins
• Generally does not improve performance along a
  trajectory traditionally valued by existing
  customers
• Introduces a new performance trajectory
• So, improves performance along parameters
  different from those traditionally valued by
  existing customers

4
Factors Affecting Internet Utilization Success

• Resources
• Processes
• Values
• Organizations whose resources, processes and
  values are sustained by the Internet have a
  distinct advantage.

5
Example 1 Process and Resource Fit

• Dell
• Telephone sales force for direct sales to
  transaction buyers
• Already had infrastructure to support telephone
  sales and product mass customization
• Made existing processes work better
• Premier pages to support business customers and
  Dell dedicated face-to-face sales staff

• Compaq
• Sold through 44,000 distributors, resellers and
  retail chains
• No direct inventory Customization at time of
  sale
• 1993 online direct to customer catalog forced off
  by distribution channel members
• 1996 direct sales 800 number resisted by dealers

6
Example 2Values and Process Fit

• Merrill Lynch
• Earned money through broker commissions (200
  vs. 30)
• Used Internet to support advisory approach to
  customers
• 1998-99 - loosing clients rapidly
• Offered online trading _at_ higher rate or unlimited
  as flat fee of 1 of assets.

• DLJ Direct
• Non-consumer investment firm, not brokerage
  although installed processing with
  acquisition-1977
• Use online trading to target consumer business
  through independent division
• Tied into existing back office processing
  infrastructure

• Schwab
• Already a discount brokerage with offices and
  telephone sales
• Customer base technically savvy and made their
  own trades
• Opened online customer service to same as
  offline-1998
• Own 27 of online trading volume-1999

7
Example 3Process Fit

• Drugstore.com/PlanetRx.com
• Pure-play Internet company positioned against
  bricks and mortar drugstores
• No existing customer base
• New infrastructure investment required for drug
  warehousing and picking as well as regulatory
  permissions
• Completely missed its primary competition
• 3 months to earn 8.5 million sales

• Merck-Medico
• Since 1969, doing mail and telephone bulk
  purchasing
• Strong alliances with corporate benefits managers
• Spends average of 100 million a year on
  technology since 1994 - warehousing, call centers
• Worked with state regulators for years to get
  permissions
• Internet as extension of existing services
• 1 week to earn 8.5 million sales

8
Example 4What is the future?

• Autobytel.com
• Pure play Internet company that aligned itself
  with dealerships
• Focused on efficiency for dealers and buyers
• Provider fee based business model
• Impacts commissions and high margin product sales

• AutoNation
• Owns 400 stores
• One price no haggle
• Sells 39 brands
• Infrastructure that supports bargain priced sales

• GM
• History - Dealer resistance to GM BuyPower and
  ranked 19th
• 50-50 joint venture with 7,000 dealers to sell
  cars over Internet
• Includes 3rd party information for non-GM car
  locating
• Issues of inventory, financing, trade-ins and
  dealer contributions

9
Cramming vs. Enabling

• Cramming
• Make disruptive technology as good or better than
  existing products
• Enabling
• Harness unique attributes of disruptive
  technology to enable people to do what they had
  not been able to do before

10
Why Does Cramming Occur?

• A natural need to play it safe
• Business tend to place the most value on efforts
  that will help to sustain or improve the margins
  from their existing customer base
• Lack of data for new disruptive markets to
  convince managers to commit resources
• Not using an emergent strategy process

11
Emergent Strategy Fatbrain

• Starts with an emergent strategy
• 1995-Cbooks Express, a computer text book
  business (b2b)
• 1997-buys Computer Literacy Bookshops to expand
  sales into retail market
• 1998-begins publishing service for its corporate
  customers (print on demand, then e-publishing)
• 1998-99-begins online consumer publishing
• 2000-MightyWords as separate business with 7,000
  titles and 4,000 authors

12
Position along the Prevailing Basis of Competition
Performance
1 Compete by offering better functionality
3 Compete with convenience speed,
responsiveness, customization
2 Compete with improvements in reliability
4 Compete on a price basis
Time
13
Position along the Prevailing Basis of Competition
Performance
1 Compete by offering better functionality
3 Compete with convenience speed,
responsiveness, customization
2 Compete with improvements in reliability
4 Compete on a price basis
Time
14
What must the Internet Business Know?

• Examples
• Real estate industry
• Studio Realty and Homestore.com
• Investment banking industry
• WR Hambrecht
• Brokerage industry
• Charles Schwab, Merrill Lynch and Edward Jones
• Travel industry
• Travelocity.com, Expedia.com and airline web
  sites
• Retail banking
• wingspan.com and BankOne

15
What must the Internet Business Know?

• Examples
• Real estate industry
• Studio Realty and Homestore.com
• Investment banking industry
• WR Hambrecht
• Brokerage industry
• Charles Schwab, Merrill Lynch and Edward Jones
• Travel industry
• Travelocity.com, Expedia.com and airline web
  sites
• Retail banking
• wingspan.com and BankOne

16
What must the Internet Marketer Know?

• Examples
• Real estate industry
• Studio Realty and Homestore.com
• Investment banking industry
• WR Hambrecht
• Brokerage industry
• Charles Schwab, Merrill Lynch and Edward Jones
• Travel industry
• Travelocity.com, Expedia.com and airline web
  sites
• Retail banking
• wingspan.com and BankOne

17
You Try Some Positioning

• 1. What is an example of new functionality
  brought us through the Internet?
• 2. How can expert web sites compete on the
  prevailing basis of competition of
  reliability/trust?
• 3. Can auto and life insurance be sold online?
• 4. Will e-book publishing succeed?

18
You Try Some Positioning

• 1. What is an example of new functionality
  brought us through the Internet?
• 2. How can expert web sites compete on the
  prevailing basis of competition of
  reliability/trust?
• 3. Can auto and life insurance be sold online?
• 4. Will e-book publishing succeed?

19
You Try Some Positioning

• 1. What is an example of new functionality
  brought us through the Internet?
• 2. How can expert web sites compete on the
  prevailing basis of competition of
  reliability/trust?
• 3. Can auto and life insurance be sold online?
• 4. Will e-book publishing succeed?

20
What must business remember about a potentially
disruptive technology like Internet?

• 1. Is enabled by infrastructure innovations
• 2. Reshapes the prevailing business to make money
  in a new way
• 3. Initially serves customers as department
  stores (portals of their day)
• 4. Enables customers to do things for themselves
  that only specialists could do before
• 5. Starts by selling simple to understand
  products, then migrated up market specialists
  (niches)
• 6. Shifts branding opportunities from the product
  to the channel as the transition to specialist
  occurs.