Business Models Components

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• Business Models Components

Gilbert Peffer JAD Workshop October 22, 2002
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Determinants of Business Performance

• Business Model
• Components and linkages
• Dynamics

Performance
Internet

• Environment
• Competitive
• Macro

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Overview of Internet Properties

• Properties of Internet
• Impact of the Internet on the 5-Cs
• Limitation to transactions over the Internet

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Properties of Internet

• Mediating technology Internet facilitates
  exchange relationships among parties distributed
  in time and space
• 4 types of interconnection
• B2B Business-to-business
• B2C Business-to-consumer
• C2C Consumer-to-consumer
• C2B Consumer-to-business
• Universality anybody anywhere in the world can
  potentially make his products available to anyone
  else in the world.
• Network externalities the more people connected
  to Internet, the more valuable it is.

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Properties of Internet

• Distribution channel Internet allows to
  distribute music, news, video, software, tickets,
  and so on.
• Time moderator Internet makes possible to obtain
  information 24 hours a day.
• Information Asymmetry Shrinker Internet reduces
  the difference of information available to
  parties.
• Infinite virtual capacity using the advances to
  storage and network technologies, customers feel
  that Internet has infinite capacity to serve
  them.

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Properties of Internet

• Low cost standard everybody uses the same
  protocol. As there is only one standard, costs
  for users are lower.
• Creative destroyer the low entry costs,
  flexibility and unlimited possibilities allow
  entrepreneurs to create new businesses.
• Transaction-cost reducer Internet reduces the
  costs of searching for sellers and buyers,
  collecting information on products, negotiating
  contracts and transportation.

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Impact of the Internet on the 5-Cs

• Properties of Internet have a huge impact on
  the 5 main activities that rest on information
  exchange coordination, community, content
  communication and commerce
• Impact on Coordination
• Internet reduces the cost of transactions
• Internet improves product-service features and
  quality
• Impact on Community
• Internet redefines communities, making them
  larger and much more valuable
• Distance and time are no drawbacks to join a
  community

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Impact of the Internet on the 5-Cs

• Impact on Content
• Information, entertainment and other products are
  delivered over the Internet to more people
• Impact on Communication
• People can exchange electronic messages
  real-time, to many people and with high content
• Every user has the capacity to broadcast messages

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Impact of the Internet on the 5-Cs

• Impact on Commerce
• B2B businesses buy and sell goods and services
  to and from each other.
• Internet provides access to sellers and buyers
  from all over the world
• Internet can create B2B hubs, to provide a
  central where sellers and buyers can go to find
  each other
• B2C businesses sell to consumers.
• Access to e-shops 24 hours a day
• Almost no limit to the number of goods an online
  retailer can display
• Firms can collect data and offer personalised
  service
• Some goods can be received instantaneously
• When the cost of finding a seller is high, the
  exchange can involve an intermediary (e.g.
  Amazon.com)
• C2C consumers sell to other consumers.
• Usually, this involves an intermediary, such as
  an action house.
• C2B consumers state their price, and firms
  either take it or leave it.
• Usually, intermediaries play an important role

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Limitations to Transactions over the Internet

• Internet cannot transmit tacit knowledge (that
  is, knowledge uncoded and nonverbalised).
• Individuals and organisations are cognitively
  limited. So, they may not be able to encode their
  knowledge into a form that can be transmitted
  over the Internet.

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Overview of Business Models

• Definition
• A taxonomy of Business Models
• Elements of a Business Model

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Definition

• An Internet business model is a set of
  Internet and non-Internet-related activities
  planned or evolving that allows a firm to make
  money using the Internet and to keep the money
  coming.
• An business model should include answers to a
  number of questions
• What value offer to customers?
• Which costumers to provide the value to?
• How to price the value?
• Who to charge for it?
• What strategies to undertake in providing the
  value?
• How to provide the value?
• How to sustain any advantage from providing the
  value?

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A Taxonomy of Business Models

• Brokerage firms act as market makers who bring
  buyers and sellers together and charge a fee for
  the transaction they enable.
• Examples travel agents, online brokerage firms,
  online auction houses.
• Advertising the owner of a website provides some
  content and services that attract visitors, and
  makes money by charging advertisers fees.
• Examples Yahoo, Altavista.
• Infomediary model a firm collects information on
  consumers and their buying habits and sells it to
  firms.

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A Taxonomy of Business Models

• Merchant wholesalers and retailers sell goods
  and services over the Internet.
• Manufacturer manufacturers try to reach end
  users directly through the Internet.
• Affiliate a merchant has affiliates whose
  websites have click-through to the merchant,
  which pays a fee to the affiliates each time a
  visitor to an affiliates site clicks through to
  the merchants site and buys something.

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A Taxonomy of Business Models

• Community users have invested in developing
  relationships with members of their community and
  are likely to visit the website frequently.
• Example iVillage
• Subscription members pay a subscription price
  and receive high-quality content.
• Utility users pay for the services they consume.

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Elements of a Business Model

• Customer value
• Customers would buy a product from a firm only
  if the product offers them something competitors
  product do not. This something can take the form
  of differentiated or low cost product.
• Differentiation a firm can differentiate its
  products in eight different ways
• Product features
• Being the first to introduce it
• Ease of access to the products
• Service
• Product mix
• Association with another firm
• Brand-name reputation
• Low cost products or services cost customers
  less than those of its competitors

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Elements of a Business Model

• Scope
• Scope deals with
• Market segments or geographic areas to which the
  value should be offered
• How many types of products that embody versions
  of this value should be sold
• Revenue sources
• Determination of the sources of a firms
  revenues and profits.
• It allows to make better strategic decisions

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Elements of a Business Model

• Price
• To profit from the value that firms offer
  customers, they have to price it properly
• Types of pricing
• Menu pricing sellers sets a price and buyers can
  take or leave it.
• One-to-one bargaining seller negotiates with a
  buyer to determine at what point the buyer
  considers the price appropriate for the value he
  is getting.
• Auction seller solicits bids from many buyers
  and sells to the buyer with the best bid.
• Reverse auction sellers decide whether to fulfil
  the orders of potential buyers.
• Barter swap of goofs for goods, or goods for
  services.

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Elements of a Business Model

• Connected activities
• A firm must perform the activities that
  underpin the value (value chain).
• The activities should be consistent with the
  value the firm is offering, reinforce each other,
  take advantage of industry success drivers and
  make the industry more attractive to the firm.
• The activities a firm performs are a function of
  where the technology is in that industrys life
  cycle, the technological evolution of the
  customers and what competitors are doing.

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Elements of a Business Model

• Implementation
• The way of carrying out the decisions depends
  on several factors
• Structure of a firm.
• Systems that allow information flow in the
  shortest time to the right target for decision
  making.
• Motivation of employees, and capability of making
  the right decisions with the available
  information.
• Recognizing the potential of an innovation.
• Organisational culture.

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Elements of a Business Model

• Capabilities
• Firms need resources to perform the activities
• Firms need the capacity to turn the resources
  into customer value and profits competence.
• The competitive advantage allows the firm to
  offer its customers better value than competitors.

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Elements of a Business Model

• Sustainability
• To sustain a competitive advantage a firm can
  pursue some subset of three generic strategies
• Block strategy a firm tries to erect barriers
  around its business model to prevent others from
  imitating it.
• Run strategy a firm must keep innovating its
  business model.
• Team-up strategy a firm can pool others
  resources to strengthen its business model.