Business Models and Strategies Underlying the World of E-Commerce

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Business Models and Strategies Underlying the
World of E-Commerce

• Dr. Bert Rosenbloom
• Rauth Chair in Electronic Commerce Management
• and
• Executive Director of the Safeguard Scientifics
• Center for Electronic Commerce Management
• Drexel University

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Electronic Commerce Management (ECM) is the
emerging business discipline that deals with the
strategic, managerial, and operational issues
associated with the technology of electronic
commerce.
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The dramatic growth of electronic commerce has
begun to raise issues that transcend the
technologies that have spawned it.
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Examples

• New business opportunities emerging for
  E-commerce.
• Changing customer relationships from E-commerce.
• Developing global strategic alliances among
  electronically linked firms.
• Managing vast networks of suppliers, customers,
  and intermediaries linked via E-commerce.
• Impact of E-commerce on organizational culture.
• Electronic commerce and government regulations,
  especially tax implications.
• Education and training of the human resources
  needed for E-commerce.
• Others --- to be discerned in the future.

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Conventional business models and strategies may
not be adequate for planning, organizing, and
controlling organizations operating in the new
environment of electronic commerce.
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New business models may be needed to operate
successfully in the world of E-commerce

• No shortage of new E-commerce models has
  already emerged. Some of which are discussed
  here.

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Ground Rules for Examining Forthcoming
E-Commerce Business Models

• Mostly just theories or hypotheses at this point
• Nobody knows yet whether any of them are right
  or wrong
• Most evidence is anecdotal
• Experience base is very short -- a couple of
  years at most
• Rigorous empirical evidence in support or
  non-support of the models is lacking

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Disintermediation Model
Elimination of Middlemen in Distribution
Channels Intermediaries become superfluous
because producers gain exposure to vast numbers
of customers in Cyberspace All thats needed is
a Wesite Millions of customers have access to
thousands of producers via the Internet. So, who
needs middlemen

• Dell Computer 14 million per day

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Reintermediation ModelAddition of Middlemen in
Distribution ChannelSpecialized intermediaries
are needed to efficiently link buyers and sellers
together in Cyberspace

• Amazon .com
• Autobytel
• Peapod Inc.
• Priceline.com
• Verticalnet

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Average Total Cost Model Conventional vs.
Internet Distribution Channels
Per Unit of Product Sold
Conventional Channel
ATC
C1
0
Q1
Units of Products Sold
Per Unit of Product Sold
Internet Channel
C1
ATC
0
Q1
Units of Products Sold
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Profit After Break-Even Point Model
Conventional vs. Internet Distribution Channels
Conventional Model
TR
Costs Revenues
Profit
TC
Loss
FC
Sales (units)
Internet Model
TR
Costs Revenues
Profit
TC
Loss
FC
Sales (units)
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Marketing Channel Flows ModelFive Flows in
Marketing Channels

• 1. Product flow
• 2. Negotiation flow
• 3. Ownership flow
• 4. Information flow
• 5. Promotion flow

• Internet superb at handling 2,3,4, and 5
  because these can be digitized and moved at
  speed of light..
• Product flow cannot be digitized and is
  processed (often by humans) and moves at best
  at speed of sound.
• Product flow may be the Achilles' Heel of
  E-commerce.

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Profits Can Wait Model

• Why?
• Because in the world of E-commerce, if the firm
  has earned a profit too soon it is probably
  spending too little to stake its claim by
  establishing infrastructure and customer
  recognition as a destination Internet player

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Get on the Internet First Model

• Its not important to have a perfected or even a
  carefully considered business concept or plan
  to operate on the Net.
• The same goes for offering an IPO.
• What is important is to be first because the
  first is the one customers remember.

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Brand Equity is Key ModelBrand equity has
shifted from product namesin the conventional
world to the names of Internet firms in the
E-commerce world

• Amazon.com
• Ebay
• Yahoo
• AOL
• Priceline.com
• Everybody knows them and everybody goes there.
• Brand equity has evolved into channel equity
• on the Internet.

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Market Cap is All That Matters ModelWho cares
about sales, earnings, real assets and people.
The only thing that matters is the size of your
market
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Lifetime Value of Customer Model

• How much revenue and/or profit will a customer
  generate over the course of a lifetime of doing
  business with you
• Old concept----- not new to E-commerce
• What is new is the use of LVC by Internet firms
  to justify

• Lack of profits
• Huge market caps
• Current users X projected growth X revenue
  produced by each over their lifetimes
• A Whole Bunch

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Perfect Market Segmentation Model
100 million customers in market
Perfect Market Aggregation (1 product)
Perfect Market Segmentation (100
million different products)
Market segment Niche marketing Micro-marketing On
e -to-one marketing Relationship building
Technological capabilities provided by the
Internet enable firms to approach the state of
perfect market segmentation.
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Its Your Marketing Channels Stupid Model

• Marketing Mix Strategic Variables (4Ps)
• Product Strategy
• Pricing Strategy
• Promotional Strategy
• Place (channel) Strategy

• Sustainable competitive advantage too difficult
  to achieve with first three Ps
• Internet provides a new frontier for creating a
  sustainable competitive advantage through the
  fourth P, channel strategy.

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Optimum Customer Service ModelCustomer tracking
and profiling capabilities via the Internet
provides near perfect information about customer
purchasing and usage patterns.

• Therefore
• Heavy buyers get heavy service and
• Light buyers get light service.
• Heavy service demand customers who
• dont spend much get cut off.
• Just ask Fidelity Investments

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Channel Conflict Model

• In the world of E-commerce, new start-ups have a
  huge advantage over firms with established
  conventional marketing channels because they can
  avoid channel conflict.
• Conventional channels of existing companies
  become baggage when they attempt to sell via
  the Internet. The poster child is

• Compaq Computer

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Convenience and Efficiency Model

• Business to Consumer Market
• E-commerce via the Internet must grow
  spectacularly because consumers want
  convenience and Internet shopping provides the
  ultimate in convenience.
• Caveat
• How about behavioral motives for shopping.
• Business to Business Market
• E-commerce via the Internet will be virtually
  the only way
• businesses deal with each other because of the
  cost effectiveness and efficiency of the
  technology.
• Caveat
• Non-rational motives also exist in the B-to-B
  market.

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Variable Cost Pricing ModelWe lose 50 on each
room but well make it up in volume.

• Silly or possible
• Answer possible

• As long as excess capacity exists and price
  charged is above variable unit costs.
• Regular price of hotel room 180
• Occupancy rate 60
• Average Fixed Cost 100
• Average Variable Cost 40
• Average Total Cost 140.
• Hotel offers half price on rooms 90
• Less AVC 40
• Contribution to FC 50

Internet is a near perfect source for this type
of information Maybe Priceline.com has a bright
future!
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Technological Equality Model

• Internet technology in E-commerce becomes
  virtually equal among firms.
• Like air conditioning and elevators, everybody
  has them and is expected to have them.
• Therefore
• Technology no longer offers any given firm a
  differential advantage
• Playing field becomes technologically level
  and so firms quest for sustainable competitive
  advantage reverts back to old fashioned
  strategy.
• For related discussion see Michael Porter,
  What is Strategy? Harvard Business Review.
  (Nov-Dec. l996).

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Internet is a Whole New Culture ModelUnless
you are

• Under 25
• Have virtually no experience
• Untainted by having worked at a conventional
  company
• Guaranteed substantial stock options
• Convinced you are a master of the Web universe
• You are not suitable to work for, provide
  consulting to, or even mix socially with the
  Internet elite.