EModels: The McKinsey Value Bubble

1
E-Models The McKinsey Value Bubble

• Gary Akehurst

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E-Business Models

• Three major determinants of business performance
  (measured by profits, cash flow, earnings per
  share, return on assets and capital)
• Business models
• The environment in which the business operates
• Change

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E-Business Models

• The business model of a business
• is the method by which a business builds and uses
  its resources to offer its customers better value
  than its competitors, and in so doing making a
  profit
• details how the business will make money
  currently and in the future
• enables the business to have sustainable
  competitive advantage
• can be thought of a system of components,
  linkages between these and dynamics

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E-Business Models
Business Models Offered value to targeted
customers Revenue sources, prices,
capabilities, value generating activities
Change Competitors, suppliers, Technologies, the
business
Performance
Environment Competitors, entry barriers,
substitutes Macro government, tech. change etc
Source after Afuah and Tucci (20014)
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E-Business Models

• Internet business models
• how a business takes advantage of the internet
• the methods by which plan to make long-term
  profits using properties of the internet, by
  building components (value, scope, revenue
  sources, pricing, capabilities, implementation,
  sustainability) and building linkages among these
• can be pure digital or clicks and mortar
• Above all, the internet makes many bricks and
  mortar strategies obsolete and offers new
  opportunities

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E-Business Models

• Properties of the Internet
• Mediating technology and interconnection of
  parties
• Universality (enlarges and shrinks the world)
• Valuable networking capabilities
• A distribution channel (replacement and extension
  effects)
• Shrinks and enlarges time via instant information
• Shrinks information power relationships
• Infinite capacity
• Low costs
• Creative shaper of new and destroyer of old
  industries
• Transaction costs reduction

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E-Business Models

• Business Model elements
• Customer value Is the business offering customers
  something distinctive or at lower cost than
  competitors?
• Does the internet give the opportunity to
  offer customers something distinctive and
  solve a new set of customer problems?
• Scope To which customers (demographic and
  geographic) is the business offering this
  value? What is the range of products/services
  offered that embodies this value?
• What is the scope of customers which the
  internet enables the business to reach? Does
  the internet alter the product or service mix
  that embodies the businesss products?
• Pricing How does the business price the value
  offered to customers?
• How does the internet make pricing different?

Source Afuah and Tucci (200149)
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E-Business Models

• Business Model elements
• Revenue source Where does the money come from?
  Who pays for what value and when? What are the
  profit margins in each market and what drives
  them? What drives value in each source?
• Are revenue sources different with the
  internet?
• Connected activities What set of activities does
  the business have to perform in order to offer
  this value and when? How connected (in cross
  section and in time) are these activities?
• How many new activities must be performed as a
  result of the internet? How much better can
  the internet help to perform existing
  activities?
• Implementation What organisational structure,
  systems, people and environment does the
  business need to carry out these activities? What
  is the fit between them?
• What does the internet do to the strategy,
  structure, systems, people and environment of
  the business?

Source Afuah and Tucci (200149)
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E-Business Models

• Business Models elements
• Capabilities What are the businesss capabilities
  and capabilities gaps that need to be filled?
  How are these gaps filled? Is there something
  distinctive about these capabilities that
  allows the business to offer value better than
  other forms and that makes them difficult to
  imitate? What are the sources of these
  capabilities?
• What new capabilities are needed? What is the
  impact of the internet on existing
  capabilities?
• Sustainability What is it about the firm that
  makes it difficult for other firms to imitate
  it? How does the firm keep making money? How
  does the business sustain its competitive
  advantage?
• Does the internet make sustainability easier
  or more difficult? How can the business take
  advantage of it?

Source Afuah and Tucci (200149)
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E-Business Models

• The value bubble model (originally designed by
  McKinsey Co)
• Focuses on the web site or e-store and strategies
  to capitalise on e-business opportunities
• Three opportunities for implementing the value
  bubble identified
• Lower cost of information delivery leading to
  superior information delivery providing greater
  value to the online customer
• Relationship building facilitated through
  interactive nature of the internet
• The e-store or online site leads to a new channel
  intermediation

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E-Business Models

• Five Value Bubble Elements in an e-business web
  site
• Attracting
• Engaging
• Retaining
• Learning
• Relating

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E-Business Models

• Five Value Bubble Elements in an e-business web
  site
• 1. Attracting (building traffic for the e-store
  understanding targeted customer needs and wants
  and selecting effective communications and media
  to inform of offerings)

Attract to site or e-store
Piggyback marketing (all contact points)
Build it and they will come misconception
Consistent branding (online and offline)
Source Albert and Sanders (200333)
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E-Business Models

• 2. Engaging (building loyalty) while visiting a
  site the hosting firm must demonstrate cost
  savings (value) quickly or the web visitor moves
  on

Engage stakeholders
Most sites lose here
Content and visual Web elements
Unique interaction (value-added)
Source after Albert and Sanders (200336)
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E-Business Models

• 3. Retaining (strengthening the relationship)
  attempts to continue prompting online visits and
  interactions empowered customers seek
  information, services and products specific to
  their needs and wants the business attempts to
  address these profitably

Retain stakeholders (repeat visits and loyalty
building)
Hidden expense
Re-fresh content
Switching costs
Database integration
Online service quality
Source after Albert and Sanders (200338)
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E-Business Models

• E-service qualities and attributes
• Access site quick to load, easy to find, other
  methods to contact company
• Ease of navigation easy site functionality
• Efficiency site well-organised and easy to
  obtain information needed (the visitor
• can accomplish something)
• Customisation and
• Personalisation personal information protected as
  confidential secure server used
• Responsiveness fast response to information
  requests and orders confirmation
• Assurance and trust reputation of company and
  site
• Price knowledge ability to compare prices for
  similar products and services delivery/shippi
  ng costs disclosed early on
• Site aesthetics site has balance of text and
  graphics (without affecting loading time)
• Reliability site consistently available,
  truthful about inventories
• Flexibility site provides choices (payment type,
  shipping, returns and searching capabilities)
• source Zeithaml, Parasuraman Malhotra
  (2000)

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E-Business Models

• 4. Learning (building the database) B2B sites
  must maintain accurate databases of inventories,
  orders, shipping/deliveries etc.

Learn about stakeholders
unprecedented
Intelligent marketing for personalisation/ custom
isation
Sources online footprint Focus on
customer Lifetime value
segmentation
Source after Albert and Sanders (200341)
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E-Business Models

• 5. Relating (data-driven interactions) applies
  the learning from the previous phase online and
  offline customer databases are integrated,
  leading to a holistic communication approach

Relate to stakeholders
Greatest contribution
Customise the interaction
interactivity
segmentation
Source after Albert and Sanders (200342)
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E-Business Models

• Afuah, A. and C.L. Tucci (2001) Internet business
  models and strategies, Boston McGraw-Hill Irwin,
  Chapter 1 and 4
• Albert, T.C. and W.B. Sanders (2003)
  E-business.marketing, Upper Saddle River, NJ
  Prentice Hall, Chapter 3 The Value Bubble
• Smith, P.R. Chaffey, D. (2002) E-marketing
  excellence. Oxford Butterworth Heinemann,
  Chapter 3 E-models
• Zeithaml, V.A., Parasuraman, A. and A. Malhotra
  (2000) A conceptual framework for understanding
  e-service quality Implications for future
  research and managerial practices, Marketing
  Science Institute, Report No 00-115.