First Mover Advantage?
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FreeMarkets
Is there pioneering advantage on internet? (Porter thinks not)
Unique assets accumulate

Number of members, member content
Barriers to new allegiances get higher

Relationship and trust grows

Adapt to technology
Factor costs increase

shortage of skilled hosts of bulletin boards and chat rooms
Acquisition becomes expensive

High stock prices and deep pockets
Components of a Business Model
VALUE PROPOSITION
The first decision is the specification of a value proposition. This value proposition, in
turn, has three parts:
1. The choice of the target segment
2. The choice of a focal customer benefit (Volvo, Southwest Airlines (conv), Four
Seasons)
3. The rationale for why the firm can deliver significantly better than competitors:
core competencies, business strength, unique resources
Unique capabilities: tangible assets– location, intangible– brand name, special skills
Marketspace Offering
Need, search, evaluation, purchase, post-purchase
Resource System
Link resources to capabilities
Financial Model
Revenue models(adv, good, trans, subs), shareholder
Components of an ONLINE Business Model
VALUE CLUSTER
1.
2.
3.
The choice of target SEGMENTS
A focal COMBINATION of customer-driven benefits
A rationale for why the firm and its PARTNERS can deliver
the cluster significantly better than competitors
Online Offering
Resource System
Financial Model
Value proposition: 1. Target segment, 2. focal benefit, 3. Rationale
Criteria to Use in Picking the Target Segments
1.
Size of the market
2.
Expected Growth: The size of the market may be small, but if growing …
3.
Unmet and unsatisfied customer needs
4.
Competitive position: Number and relative strengths of competitors: The less
competition the better
5.
Cost of reaching the market: Is the market accessible to a firm’s marketing
actions?
6.
Compatibility with the organization’s objectives and resources.
Value proposition: 1. Target segment, 2. focal benefit, 3. Rationale
Four value propositions for flower dot com competitors
1.
2.
3.
4.
PC Flowers and Gifts serves the “special occasions” segment (the target
segment) with “fresh flowers, complementary gifts, and lower prices (the
three key benefits) because of their accumulated online experience and
knowledge since 1989 and their unique, broad product line of
complementary gifts (the two key differentiating capabilities).
Proflowers serves the “price sensitive and convenience oriented customers”
with the “freshest cut flowers at a competitive price” because of their unique
sourcing and FedEx shipping arrangements.
FTD.com serves “the mid- to high-end market” by providing the “easiest
way to send flowers and gifts” because of their strong brand name, market
communications, and supplier network.
1-800-flowers.com serves the “mid- to high –end market” with a broad gift
assortment, fresh flowers, reasonable prices, and easy access because of their
strong brand name, product and media partnership, and brick-and-mortar
network of franchises (i.e., Blooment).
The Marketspace or Online Offering
The senior management team must complete three sequential tasks:

Identify the scope of the offering
–
–
–
–
Number of categories offered in the site
“Category killer”
Online: Extension from one category to others: Amazon
Amazon: Supply-side cross-category dominance– products that naturally group
together from a logistics and distribution point of view. (1) physical goods, (2) can
be stored in inventory, (3) cannot be digitized, (4) are consumer focused.
– Online Metamarkets: Clustering categories based on how consumers engage in
activities: entertainments site, sports sites, dining, travel.


Identify the customer decision process
map the offering (product, service, and information) to the consumer
decision process
Consumer Decision Process
Problem - Recognition
PRE-PURCHASE
Information Search
Evaluation of Alternatives
PURCHASE
Purchase Decision
Satisfaction
POST-PURCHASE
Loyalty
Disposal
Consumer Decision Process — Flower Example
Flowers
Problem - Recognition
Pre-Purchase
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)
Information Search
Evaluation of Alternatives
Purchase

Purchase Decision


Post-sales support
– Order tracking
– Customer service

Education on flowers and decoration
Post sales perks
Satisfaction
PostPurchase
Loyalty
Disposal

The Online Offering for 1-800-flowers.com





“Care and handling”
“Do it yourself”
Special events and
educational
workshops held at
stores
Product
Offering
Post-Sales Support
 Order receipt email
 eQ&A online customer
service
 FAQ
 Customer service
inquiry form
Perks






Gift reminder service
Holiday specials
Ideas and Information
Everyday celebrations
 Floral ideas
 Garden ideas
suggestions
 Home ideas
Special occasion suggestions
 Gift ideas
 Gourmet ideas
Need
 Store locator
Recognition
 Recommendations by budget
 Best sellers
Education on Flowers
and Decoration
Search For Ideas
and Offerings
Gift Recommendations
 Gift guru
 Favorite gifts
 Gift frequency
 Gift impossible
 Gift baskets
 Corporate gift services
Flower / Gift Decision Process
Post Sales Support
and Perks
Miles earned with
flower purchases
Free gifts
Discounts at AOL
& BN with flower
purchases
Member specials
Evaluation of
Alternatives





Message
Selection


Gizmo fully-animated
greeting cards
Physical cards in gifts
Purchase
Decision



Shopping basket
E commerce transaction
Special shopping features
– Delivery outside U.S.
– 1-800-lasfloras.com
Product price
Product picture
Product description
Delivery information
Delivery availability
Travel (Travelocity?)
Five steps
Need Recognition– reminders of football games, events, approaching vacations
Information Search – Ideas for vacations, information about places
Evaluation of alternatives – Time, Price, Class, # of connections, restrictionss
Purchase – Internet and phone secure transactions, combos with peripherals
Post purchase– Order receipt email, Frequent flier miles, customer service, flight
reminders
Schwab
1970s: Mission: To provide investors with the most useful and ethical brokerage services
in America. Resolved to build the business around client needs. Over the next several
years, Schwab became a resource for individual investors - a discount brokerage where
investors could manage their assets, make decisions and transact business without the
conflict of interest and high-pressure sales tactics of traditional brokerages.
1980s: Mutual funds began emerging as the primary investing vehicles for investors
seeking convenience and portfolio diversification. In 1984 created the mutual fund
supermarket concept: hundreds of funds available through The Schwab Mutual Fund
MarketPlace®. By the end of the decade, it sold itself to Bank of America and then bought
itself back, then took the company public. In 1992, Schwab introduced MutualFund
OneSource®. In its first five years, OneSource assets grew from less than $2 billion to
more than $50 billion.
In the mid-1990s, Schwab anticipated the power the Internet would have for individual
investors, and invested heavily in, and aggressively prepared for, online investing.
Foresight in the mid-1990s earned Schwab an early and significant leadership position in
online investing. From 1996 to 1998, online accounts grew to 2.2 million from 600,000, and
online assets grew to $174 billion from $42 billion.
Schwab Online Offering


Product
Offering





Online chat with Customer
Service Representatives
Customer Service via phone
Customer Service via email
Customer Service at Branch
My Watch List



Schwab Learning Center
Live Events
Principles of Investing
Understanding Market Cycles
“Did You Know” Q&A
Get educated
about
investing
Post
Investment
Support
Overall
 General Goal
Planner
 Investor Profile
 Sample
Investment Plans
Retirement
Estate
 Retirement
 Estate Tax and
Planner
Probate Calculator
 IRA Analyzer
 Alternatives Comparison
College
Plan
 College Planner
investments
Tax
 Tax Strategies
 IRS Withholding
Calculator
On-Line Investment Process







Margin Loans
Money Transfers
Automatic
Investing
Options Service
After Hours
Trading
Account Protection
Bill Payment
Perform
Investment
Decide on
Investment




Schwab Signature
Services
Schwab AdvisorSource
Options Service
Global Investing Service
Overall
 Quotes and Charts
Perform
 Analyst Center
Research
Stocks and Options
 Stock Analyzer
Bonds and Treasuries
 Schwab BondSource
Services
Annuities
CDs and Money Markets
 Schwab Select
 SchwabOne
Annuity
Life Insurance
 Insurance Needs
Calculator
The Resource System
Five steps in constructing a resource system:
1.
2.
3.
4.
5.
Identify core benefits in the value cluster.
Identify capabilities that relate to each benefit
Link resources to each capability
Identify to what degree that firm can deliver each capability.
Identify partners who can complete capabilities.
1-800-flowers.com Resource System
BloomNet
Network
Address Book
Gift
Recommendations
Online Gift
Center
Gift Reminder
Third Party
Contractors
Strong
Distribution
Network
Fulfillment
Center
Stores
Rich Content
Broad
Assortment
of Gifts
High Quality
of Flowers
Personalization
Capabilities
Popular Web
Site
Garden Works
Integrated
Partner Offers
Telephone
3,000 Affiliates
Plow & Hearth
On-line
Great Foods
Widespread
, Easy
Access
Customer
Service
Multiple Contact
Points
Catalog
Technology
Custome
r Service
Centers
= Core Benefits
= Activities & assets
= Capabilities
Integrated
on-line offline
systems
Strong Brand
Name
Wide Reach to
Customers
SNAP
Starmedia
AOL
MSN
Franch
ise
Stores
Schwab Resource System
Learnin
g
Center
Invest
in CSR
Trainin
g
Onesource
Center of
Knowledge and
Innovation
Investm
ent in
R&D
Customer Service
Innovative
Products
Cutting Edge
Technology
Optimize
Staff in
Branches
Charge
For Value
Added
Services
Provide
Lower
Commission
for Frequent
Traders
= Core Benefits
= Capabilities
= Resources
Align CSR
Compensation
with Quality
of Service
Investment in IT
Hire IT
Staff
Train IT
Staff
System Reliability
24x7
Access
Partnerships with
Content Providers
Multiple Points of
Access
Hoover
s
Streamlined
Operations
Lower
Prices
Competitive
Commission Rates
Superior
Service
Online
Phone
S&P
Media
General
Branch
Financial Models– Revenue Models
1.
2.
3.
4.
Advertising: A site can earn advertising revenue through banner ads and
other forms of communication.
Good, service, or information sales: Income is generated from
straightforward sale of goods, services, or information.
Transaction- Charging a fee for facilitating a seller-buyer transaction
(Schwab, eBay)
Subscription- charging a periodic fee for services or information.
Web-business models:
Revenue-based business models.
Provider-based: Content sponsorship, retail alliance, exclusive deals, banner
ads, prospect fees, commissions.
User-based models: …
VALUE MODELS
Profit and high margins – provide better than competitors in marketspace.
Six value models that rely on key customer need or benefit:






Best information (zagat.com)
Widest Assortment (Secondspin.com)
Lowest Prices – avoid competing directly – hotwire, priceline
Broadest User Network – network externalities-- AOL
Best experience – quality and perceived luxury-- Ashford.com
Most personalized – customization – reflect.com, Amazon.com
Alternative Value Models
Alternative
Models
Description
Examples
Revenue
Model
Company Derived
Best
Information
 Timely, high
value-added
information
Widest
Assortment
 Widest assortment
within category
 Forrester
 Zagat
 Product
Sales
pricing based on
perception of
best information
of
information
 Perceived
quality of information
 Competitors
Key Threat
Factors
Best
Experience
Highest perceived quality
merchandise
Most
Personalized
 Highest customization
Ashford.com

Lowest prices
within category
 ArtistDirect.com
 Secondspn.com

Buy.com
Lowestfares.com
 ICQ


Product sales

Product sales
 Varied
Product

Selective premium pricing

Unclear
 Users
Level
Reduce uncertainty in offering
 Quality of information and
value-added
services
 Specialization
within the
category
 Emergence of
dominant
brands

Operational
excellence
 Supply-chain
management
drive
traffic
 Standard
emerges
 Price premium
follows
 Establish standard
 Grow network
 Network ext.

 Alternate
Subniche
 MP3
sales

Reflect.com
Amazon.com

Product sales
 Subscriptions
 Timeliness
Key Success
Factors
Broadest User
Network
 Aggregation of
users around
standard

 NYTimes
 Premium
Value Source
Lowest Prices
match market
leaders
 Cost of “freshness”

Shopbots
 Lack of profit
imperative
 Shifting investor confidence
 Niche markets
standard emerges
 Technology
shift
 Backward or
forward integration of
complementary players
of Luxury  Level of customization
drives
drives preprices
mium pricing
Premium
Ability
to spot
symbolic
brands
Ability to judge
quantity
markets emerge
by category
Symbolic brand
loses appeal

Deep Customer Knowledge
 Ability to
“Mine” Customer Database

Customers
wants control
of personalization
The Dell Direct Model
The Dell Direct Model is a low-cost distribution system characterized by direct
customer relationships, build-to-order manufacturing, and targeting specific
market segments.
The Dell process became a model of efficiency for the industry. Entire process
from order receipt to product shipping: 36 hours. Parts ordered on a just-in-time
basis. Suppliers locating warehouses right next to Dell factory.
When a system is ready for shipping, the monitor supplier would ship monitor,
scheduled for arrival same day as system.
1,300 technical support representatives to solve problem over phone –
Maintenance agreements with service companies who send technicians.
PC DISTRIBUTION
1.
2.
3.
4.
Four fundamental means of distribution for PCs:
Direct – Dell is only one to focus solely on direct
Consumer Retail
Indirect through VARS
Indirect through national resellers
PC Distribution Channels
RETAIL
Indirect
through VARs
Indirect through
National Resellers
Dell Direct Model
Dell’s value cluster:
1. Target segments
– Transactional 30%
 Businesses with 2-400 employees
 Catalogue sales
– Relationship 40%
 Companies with > 400 employees
 Less price sensitive
2. Focal customer benefits
Lower Prices
Quick delivery
Fully customized product
High post purchase service quality
3. Rationale for why it can deliver better than competitors
Just-in-time inventory and Built-to-order manufacturing– factory and agreements with suppliers,
such as location of supplier warehouses, and vendors’ delivery schedules
Direct customer relationship -- Cutting out the middleman
Strong and coordinated sales and support staff
Can Dell really deliver better than competitors?
Direct customer relationship: In July 1997, Compaq announced its new buildto-order manufacturing process and established direct sales teams and
telephone centers that would ship directly to customers.
By September, it was not working for Compaq:
Bill Ramsey, VP of manufacturing:
“By no means is Compaq abandoning the channel, but if it is to fight back
against Dell and other direct PC vendors it must have the same advantages and
mirror their business practices. It is a calculated risk, because we must do so
without upsetting the channel, because the Dell model for all its efficiencies can
only cover so much of the market. You need the channel if you want to get them
all.”
Mass customization: IBM and HP were transferring more assembly to
distributors and dealers, shipping them only “bare bones” systems.
How is the Dell Online Business Model Different?
Look at Dell’s Web Site
Direct Extension
Segmentation and Profiling
Service Efficiencies
Premier Pages for Relationship Customers
Residential Customers (“dudes”)
Diversification
What are the risks in Dell’s expansion to other segments and product lines?
Grocery Online: Can it be Done?
What are some problems?

Timely delivery and freshness of items

Cost of delivery

Quality of delivery and
Delivery schedule convenience


Aisle browsing and Item selection
Shipping Rates
PEAPOD DELIVERY SCHEDULE-- CONVENIENCE
COST OF DELIVERY TO CONSUMER
Delivery Fees
Peapod shopping and delivery costs just: For orders over $75.00 the delivery fee is $4.95. For orders less than $75.00 (min $50) the delivery fee is
$9.95.
Delivery regions:
Limited: Eight metropolitan markets in the United States translating into 100,000 households.
How Peapod keeps cost of delivery low yet speedy:
Limited regions
Royal Ahold alliance
Order fulfillment technology and proprietary transportation routing system, which helps it achieve accuracy and efficiency in picking, packing and
delivering.
Two distribution centers - one in Chicago and the other in the New York suburbs.
In other regions, workers pull products off supermarket shelves and deliver them same-day.
Peapod also generates revenues by charging supermarkets to fulfill phone and Net orders.
Peapod will not use its new warehouses to get into the national dry-goods shipping business. They argue that with the NetGrocer model, it costs
more "to ship a box of Tide than it does to make a box of Tide. Dry-grocery products just don't have the margin that permits you to ship them at a
profit.”
VIRTUAL GROCERY STORES
Can it be done?
Can it be profitable?
Will it ever become more popular than brick and mortar grocery stores? Why or why
not?
STREAMLINE’S BUSINESS MODEL
VALUE CLUSTER
1.
2.
3.
Target SEGMENTS
A focal COMBINATION of customer-driven benefits
A rationale for why can do better than competitors
Online Offering
Resource System
Financial Model
Streamline’s Value Proposition
Affluent busy suburban families
Lifestyle solutions– assortment
Simplicity
Rationale
Streamline’s unique ability to eliminate the requirement that customers
be available to receive shipment
Streamline’s wide assortment of expertises
Online Offering
Deliveries for groceries, dry cleaning, photo development, and video rental
Payment and billing
Resources
Consumer Resource Center – fill orders
A patented delivery receptacle - refrigerator
Consumer Learning Center as an ongoing research lab for consumer-direct
industry
Streamline
What aspects of the business are easily replicated?
What aspects represent key competitive advantages?
What kinds of information is Streamline likely to collect on its subscriber households? How might
Streamline use such information in serving customers?
Given Peapod’s model, what is wrong with Streamline’s?