Business Models - Part 1

1
Business Models - Part 1

• CPS 181s
• Jan 28, 2003

2
Market Opportunity Analysis Where will
business compete? Business Model How will
company win?
3
Questions

• ? What is a business model?
• ? Do firms compete on value propositions or value
  clusters?
• ?How does a firm develop an outline
  offering-whether product, service, or
  information?
• ? What is a successful, unique resource system?
  What are characteristics of good resource
  systems?

4
Questions

• ? What are the financial models available to
  firms?
• ? What business classification schemes seem most
  appropriate for eCommerce?

5
Components of A Business Model

• Four business choices on the part of senior
  management
• a value proposition or a value Cluster for
  targeted customers
• a marketspace offering
• product, service, information, or all three
• a unique, defendable resource system
• a financial (revenue) model

Heidi Roizen
6
Components of a Business Model
Value Cluster
Online Offering
Resource System
Financial Model
Lise Buyer
7
Value Propositions or Value Clusters

• First step is to specify the value proposition
  for the business
• Items include
• 1) choice of target customer segment
• 2) choice of focal customer benefits
• 3) rationale for why the firm can deliver the
  benefit package significantly better than
  competitors in the same space
• Can view as value cluster (on-line customization
  capability)
• the choice of target customer segments
• a particular focal combination of customer-driven
  benefits that are offered
• the rationale for why this firm and its partners
  can deliver the value cluster significantly
  better than competitors

8
1) Choice of Segments

• Target segments
• Market size and growth rate
• Unmet or insufficiently met customer needs
• Weak or nonexistent competitors
• Examine ability to compete through examining a
  business strengths matching the customers
  benefits desired

9
1) Choice of Segments...

• Degree of fit with existing channels
• Can be
• demographic segments
• benefit segments, or
• combination
• Segmentation example
• demographic segment
• the under-30 segment
• upper-income segment
• benefit segment
• fresh flowers
• most convenient buying method
• lowest priced flowers
• Must maximize actionability and meaningfulness

Yossi Vardi
10
2) Choice of Focal Customer Benefits

• Factors
• price
• customer support
• on-time delivery
• shipping and handling
• privacy concerns
• Price sensitivity can actually decrease when
  usability of quality information increase
• Could be the dominated by direct buying from
  manufacturer
• Trying to compete on more than one benefit
  creates problems
• customers confused about message
• on supply side, systems must be uniquely
  constructed to deliver certain benefits (forces
  compromise solutions, i.e., low price/fast
  delivery)

11
Point-Counterpoint Single Vs. Cluster of Benefits
12
Shattering Myth That Consumers Care Only About
Prices On-line
PERCENTAGE OF CUSTOMERS WHO CARE ABOUT ATTRIBUTE
ATTRIBUTE
Source JP Morgan Report etailing and the five
Cs
13
3) Firms Ability to Deliver Unique and
Differentiating Capabilities

• Factors inside the firm leading to delivery of
  targeted benefits
• core competencies
• business strengths
• strategic control points
• unique resources
• unique capabilities
• Key is linking directly to the core benefits that
  customers value most

14
Flower Industry Framework

• Highly competitive
• Rapidly changing
• 15B domestic
• Highly fragmented
• No National brand
• Multiple layers of distribution

• Uneven product quality
• Sold 10-12 days after harvest
• 60 walk-in sales
• 80 sales are for local delivery

15
On-line Flower Market

• 350M (1999) gt 2.5B (2004)
• Value Proposition of on-line retailers is quite
  similar
• High prospect of consolidation

16
Value Propositions or Clusters

• Dot.com flower comparisons
• PC Flowers Gifts
• special occasions target segment
• key benefits
• fresh flowers
• complementary gifts
• lower prices
• differentiating capabilities
• online experience and knowledge
• unique, broad product line of complementary gifts
• Proflowers
• price sensitive, convenience oriented
• freshest cut flowers at competitive prices
• FedEx shipping

17
Value Propositions or Clusters...

• FTD.com
• mid-to-high end market
• ease of sending flowers and gifts
• supplier network
• 1-800-flowers.com
• mid-to-high end market with broad assortments,
  fresh flowers, reasonable prices
• easy to access because of
• their strong brand name
• product and media partnerships
• brick-and-mortar network of franchises (I.e.
  Bloomnet)

How differentiated are these value propositions?
18
Classes of Criteria

• Customer Criteria
• understand criteria?
• relevant to needs?
• believable?
• unique or me-too?
• provoke action?
• Company Criteria
• a rally point?
• resources or capabilities available?
• block or facilitate move to additional vertical
  markets?
• Competitive Criteria
• others attempting to hold a similar proposition
  or cluster?
• will others allow the focal company to own
  cluster?
• can competitors match cluster?
• ease at matching cluster?

19
Components of a Business Model
Value Cluster
Online Offering
Resource System
Financial Model
Lise Buyer
20
Develop an Online Offering

• Articulating broad description of the online
  product/service through three sequential tasks
  (not yet designing content look feel)
• 1) Identify scope of the offering
• 2) Identify customer decision process
• 3) Map the offering (product, services,
  information) to the decision process

21
1. Scope of Offering

• The categories of products and services offered
• Category-specific dominance(increasingly rare)
• Cross-category dominance
• Amazon supply side logically grouped for
  logistics and distribution
• Physical goods
• Stored in inventory
• Can not be digitized
• Consumer focused

22
1. Scope of Offering...

• metamarkets
• those sites offering a category of clustered
  goods and services
• Customers think in terms of activities, while
  firms think in terms of productsMetamarkets,
  then, are clusters of markets in the minds of
  customers.
• Online businesses can be organized in a variety
  of goal-derived ways.

23
2. Identify Consumer Decision Process

• Articulating the consumer decision process for
  the various product categories
• Prepurchase
• Purchase
• Postpurchase

24
Consumer Decision Process Flower Example
Flowers

• Need recognition, potentially triggered by a
  holiday, anniversary or everyday events

• Search for ideas and offerings, including
• Available on-line and off-line stores
• Gift ideas and recommendations
• Advice on selection style and match

• Evaluation of alternatives along a number of
  dimensions, such as price, appeal, availability,
  etc.

• Purchase decision
• Message selection (medium and content)

• Post-sales support
• Order tracking
• Customer service

• Education on flowers and decoration
• Post sales perks

25
3. Mapping Products and Services onto the
Customer Decision Process

• Articulating the steps of the decision process
  for a particular product category
• Identify the products, services, and information

26
Egg Diagram for 1-800-flowers.com

• Gift reminder service
• Holiday specials
• Everyday celebrations suggestions
• Special occasion suggestions

• Care and handling
• Do it yourself
• Special events and educational workshops held at
  stores

Ideas and Information

• Floral ideas
• Garden ideas
• Home ideas
• Gift ideas
• Gourmet ideas
• Store locator
• Recommendations by budget
• Best sellers

Flower / Gift Decision Process

• Need Recognition

Product Offering

• Education on Flowers and Decoration

• Search For Ideas and Offerings

Post-Sales Support
Gift Recommendations

• Order receipt email
• eQA online customer service
• FAQ
• Customer service inquiry form

• Gift guru
• Favorite gifts
• Gift frequency
• Gift impossible
• Gift baskets
• Corporate gift services

• Post Sales Support and Perks

• Evaluation of Alternatives

Perks

• Miles earned with flower purchases
• Free gifts
• Discounts at AOL BN with flower purchases
• Member specials

• Product price
• Product picture
• Product description
• Delivery information
• Delivery availability

• Purchase Decision

• Message Selection

• Shopping basket
• E commerce transaction
• Special shopping features
• Delivery outside U.S.
• 1-800-lasfloras.com

• Gizmo fully-animated greeting cards
• Physical cards in gifts

27
Components of a Business Model
Value Cluster
Online Offering
Resource System
Financial Model
28
What Is a Successful, Unique Resource System?

• Value proposition and offering specification
  critical
• Dictate resource system of the company
• Unique activities, tied to a value proposition,
  lead to a competitive advantage
• Selection of capabilities and activities
• Supply of resources
• Four modifications for e-Commerce
• Shift from Physical World to Virtual-and-Physical
  World
• Shift from a Supply-Side Focus to a Demand-Side
  Focus
• initial focus on the benefits desired by targeted
  customers
• Shift from Activities to Capabilities
• higher order of skills and assets of the company
• physical or intangible assets (Yahoos brand
  name, Pricelines patents)
• Shift from Single to Multifirm Systems
• partnerships

29
Specifying a Resource System

• Step 1 - Identify Core Benefits in the Value
  Cluster

30
1-800-flowers.com Resource System
Broad Assortment of Gifts
High Quality of Flowers
Customer Service
Widespread, Easy Access
Core Benefits
Activities assets
Capabilities
Partnerships
31
Specifying a Resource System

• Step 1 - Identify Core Benefits in the Value
  Cluster
• Step 2 - Identify Capabilities That Relate to
  Each Benefit

32
1-800-flowers.com Resource System
Strong Distribution Network
Online Gift Center
Broad Assortment of Gifts
High Quality of Flowers
Popular Web Site
Integrated Partner Offers
Customer Service
Widespread, Easy Access
Multiple Contact Points
Technology
Wide Reach to Customers
Strong Brand Name
Core Benefits
Activities assets
Capabilities
Partnerships
33
Specifying a Resource System

• Step 1 - Identify Core Benefits in the Value
  Cluster
• Step 2 - Identify Capabilities That Relate to
  Each Benefit
• Step 3 - Link Resources to Each Capability,
  and..
• Step 4 - Identify to Which Degree the Firm Can
  Deliver Each Capability

34
1-800-flowers.com Resource System
Address Book
Strong Distribution Network
Gift Recommend- ations
Fulfillment Center
Stores
Online Gift Center
Gift Reminder
Broad Assortment of Gifts
High Quality of Flowers
Rich Content
Personalization Capabilities
Popular Web Site
Integrated Partner Offers
Telephone
On-line
Customer Service
Widespread, Easy Access
Multiple Contact Points
Fran -chise Stores
Catalog
Technology
Wide Reach to Customers
Strong Brand Name
Customer Service Centers
Core Benefits
Activities assets
Integrated on-line off-line systems
Capabilities
Partnerships
35
Specifying a Resource System

• Step 1 - Identify Core Benefits in the Value
  Cluster
• Step 2 - Identify Capabilities That Relate to
  Each Benefit
• Step 3 - Link Resources to Each Capability
• Step 4 - Identify to Which Degree the Firm Can
  Deliver Each Capability
• Step 5 - Identify Partners Who Can Complete
  Capabilities

36
1-800-flowers.com Resource System
Third Party Contractors
BloomNet Network
Address Book
Strong Distribution Network
Gift Recommend- ations
Fulfillment Center
Stores
Online Gift Center
Gift Reminder
Broad Assortment of Gifts
High Quality of Flowers
Rich Content
Personalization Capabilities
Popular Web Site
Garden Works
Integrated Partner Offers
Telephone
3,000 Affiliates
Plow Hearth
On-line
Customer Service
Widespread, Easy Access
Great Foods
Multiple Contact Points
Fran -chise Stores
Catalog
Technology
Wide Reach to Customers
Strong Brand Name
Customer Service Centers
Core Benefits
SNAP
Starmedia
Activities assets
Integrated on-line off-line systems
AOL
MSN
Capabilities
Partnerships
37
Criteria to Assess the Quality of a Resource
System

• Uniqueness of the System
• Links between Capabilities and Benefits
• Links Among Capabilities in the System
• Links among Resources
• Links between Virtual World and Physical World
  Business Systems
• Sustainable Advantage

Donna Dubinsky
38
Benefits and Challenges of Integrated
Online/Offline Business Model
Benefits
Challenges

• Persistent connection with customers
• New value for customers
• Access to new customers
• Scalability

• Cannibalization
• Channel conflict
• Customer confusion
• Investor confusion

39
On-line/Off-line Egg Diagram for
1-800-flowers.com

• Prompts on toll free number recording
• Suggestions from CSRs in stores and via phone

• Special events and educational workshops held at
  stores

• Prompts on toll free number
  recording
• Suggestions from CSRs in stores and via phone
• Brochure

• Gift reminder service
• Holiday specials
• Everyday celebrations suggestions
• Special occasion suggestions

Ideas and Information
Off-line Product Offering

• Floral ideas
• Garden ideas
• Home ideas
• Gift ideas
• Gourmet ideas
• Store locator
• Recommendations by budget
• Best sellers

• Care and handling
• Do it yourself

Flower / Gift Decision Process

• Need Recognition

On-line Product Offering
Gift Recommendations

• Education on Flowers and Decoration

• Search For Ideas and Offerings

• Suggestions from CSRs in stores via phone
• Brochure

• Gift guru
• Favorite gifts
• Gift frequency
• Gift impossible
• Gift baskets
• Corporate gift services

Post-Sales Support

• Order receipt email
• eQA online customer service
• FAQ
• Customer service inquiry form

• In-store customer service
• Customer service on toll-free number

• Post Sales Support and Perks

• Evaluation of Alternatives

• Information from CSRs in store and via phone
• Brochure

• Product price
• Product picture
• Product description
• Delivery information
• Delivery availability

Perks

• In-store specials
• Specials offered via phone

• Miles earned with flower purchases
• Free gifts
• Discounts at AOL BN with flower purchases
• Member specials

• Purchase Decision

• Message Selection

• Shopping basket
• E commerce transaction
• Special shopping features
• Delivery outside U.S.
• 1-800-lasfloras.com

• Gizmo fully-animated greeting cards
• Physical cards in gifts

• Purchase in-store
• Purchase via phone

• Select card in-store
• Select card via phone

CSR Customer service representative
40
On-line and Off-line Integration for the
1-800-FLOWERS Resource System
Third Party Contractors
BloomNet Network
Address Book
Strong Distribution Network
Gift Recommend- ations
Fulfillment Center
Stores
Online Gift Center
Gift Reminder
Broad Assortment of Gifts
High Quality of Flowers
Rich Content
Personalization Capabilities
Popular Web Site
Garden Works
Integrated Partner Offers
Telephone
3,000 Affiliates
Plow Hearth
On-line
Customer Service
Widespread, Easy Access
Great Foods
Multiple Contact Points
Franchise Stores
Integrated on-line off-line systems
Catalog
Technology
Wide Reach to Customers
Strong Brand Name
Customer Service Centers
On-line Activities Assets
SNAP
Starmedia
Off-line Activities Assets
Integrated on-line off-line systems
AOL
MSN
41
The Role of Partnerships

• For 1-800-flowers.com
• Portal Agreements
• America Online
• Microsoft Networks
• Yahoo! Inc.
• Excite_at_Home
• StarMedia Network
• Anchor Tenant Agreements
• Snap.com
• Sears, Roebuck, and Company
• Promotion Agreements
• American Airlines Advantage, Delta Airlines
  SkyMiles, United Airlines Mileage Plus Frequent
  Flyer Miles
• MCI Worldcom Gift Certificates, 10 discount
• PeoplePC Became key floral and gift provider
• Zapa.com Offers greeting cards on
  1-800-flowers.com, allowing personalization

42
1-800-FLOWERS Partnerships

• American Airlines Advantage, Delta Airlines
  SkyMiles, United Airlines Mileage Plus
• Earn frequent flyer miles with 1-800-FLOWERS.com
  purchases
• MCI Worldcom
• Receive 1-800-FLOWERS.com gift certificates with
  long distance sign-up
• Receive 10 off every 1-800-FLOWERS.com purchase
  with MCI WorldCom membership
• America Online
• First agreement signed in 1994
• Exclusive marketer of fresh-cut flowers across
  key AOL brands until 2003
• One-year exclusive agreement to market gardening
  products commencing Nov. 1999
• Microsoft Networks
• Premier floral partner and anchor in the MSN Home
  and Garden Department
• Products, advertising and links featured on MSN
  Shopping Channel
• Snap.com
• One of the 45 premier merchants in Snap shopping
  service (on-line e-superstore)
• Anchor tenant in Snap.Com Flower Shop
• To be spotlighted in select Snap.com on-air
  promotions, scheduled to run on the NBC
  Television Network during the Valentines Day and
  Mothers Day periods

Source 1-800-FLOWERS.com website, WR Hambrecht
Co., TheStandard.com. Hoovers Online
43
1-800-FLOWERS Partnerships (Cont.)

• Excite_at_Home
• Markets flowers and other gifts through
  Excite.com and webcrawler.com web sites
• Products, advertisments and links featured in the
  Excite Shopping Channel
• Entered second year of marketing relationship in
  October 1999
• Yahoo! Inc.
• Will run banner advertisements throughout the
  Yahoo! Network, with additional presence in
  shopping area
• StarMedia Network
• Developing Spanish and Portuguese language
  versions of 1-800-FLOWERS.com web site
• People PC
• Signed one year agreement to become key floral
  and gift-provider for PeoplePC commencing October
  1999
• Zapa.com
• Offers selection of online greeting cards on
  1-800-FLOWERS.com web site
• Greeting cards never deleted by Zapa.com
• Users will be able to personalize greetings with
  their own photos, clip-art or other multi-media
  creations
• Sears, Roebuck and Company
• Licensing relationship which enables Sears
  customers to use their store charge cards when
  shopping with 1-800-FLOWERS.com

Source 1-800-FLOWERS.com website, WR Hambrecht
Co., TheStandard.com. Hoovers Online
44
Components of a Business Model
Value Cluster
Online Offering
Resource System
Financial Model
Yossi Vardi
45
Case Study - Frontgate Catalog

1. Why has Frontgate Catalog met with such success
   as a new catalog offering in an already crowded
   direct-mail market?
2. Who are the customers who buy from Frontgate??
3. What aspects of its operations enhance the
   customers level of perceived value,
   satisfaction, and loyalty?
4. Given that customer lifetime value drives
   profitability of any direct marketing business,
   how should Frontgate managers maximize the value
   of the catalogs customer relations?
5. Evaluate the existing Frontgate catalog site on
   the Web.  How well suited is the site to building
   awareness, selling product, and providing
   customer service in the Web environment?
6. Is Frontgates stated plan for its website
   implementation reasonable and sound?  What
   changes in strategy or tactics would you
   recommend?