Electronic Business Models
Dr Sherif Kamel
The American University in Cairo
Copyright © 2003 Sherif Kamel
Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Outline
Components of business models.
eBusiness and change.
B2B business models.
B2C business models.
Copyright © 2003 Sherif Kamel
Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Business models — today’s objective
To develop an understanding of business models for the
networked economy
Where will the
business
compete?
How will the
business win?
Copyright © 2003 Sherif Kamel
Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Components of a business model
Developing a business model in the networked economy requires four key choices on the part
of the senior management:
Value cluster
Marketspace offering
Resource system
Financial model
Copyright © 2003 Sherif Kamel
• Specify the value proposition or
the value cluster for the business
• Articulate the online product,
service and information offer
• Define how the company needs to
align its resources to deliver the
value proposition
• Define and select the most
appropriate revenue model to
pursue
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Copyright © 2002 Marketspace LLC
Value proposition/cluster
The first step in the articulation of the business model is clearly specifying the value
proposition or the value cluster for the business:
Defining the value proposition or the value
cluster requires managers to answer the
following questions:
Value Cluster
• Which target segments should the
company focus on?
• What is the combination of customer
benefits that is offered?
Marketspace offering
• What makes the firm and its partners
better positioned to deliver the offering
than anybody else?
Resource system
Financial model
Copyright © 2003 Sherif Kamel
Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Value proposition/cluster
The definition of the value proposition is the result of a combination of choices about the
customers, the benefits offered and the unique capabilities of the firm:
Target
Segments
PC Flowers
and Gift
FTD.com
+
Key Benefits
Offered
+
Unique
Capabilities
Value
Proposition
“The special occasion
segment”
• Fresh flowers
• Complementary gifts
• Low prices
• Online experience
• Unique, broad product
line of complementary
gifts
“PC Flowers & Gift serves
the special occasion
segment by providing fresh
flowers and unique
complementary gifts”
“Mid- to high-end
market”
• Easy delivery of
flowers
• Strong brand name
• Market
Communication
• Supplier network
“FTD.com provides the
mid- to high-end market
with the easiest way to
send flowers thanks to its
extended network of
suppliers”
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Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
CarPoint Example
CarPoint’s value cluster offers benefits that address multiple segments of customers:
Target
Segments

CarPoint

“The
intimidated by
the process”
“The
information
seekers”
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Key Benefits
Offered
+



Unique
Capabilities
+
Information
about cars and
their prices
Help on how to
deal with dealers
(tactics used,
etc.)

Extensive
information
- In different
formats (3D
views, pictures,
videos)
- From different
sources (i.e.,
Kelley Blue Book)



Knowledge of
the Internet
Software
development
expertise
Microsoft brand
name
Network of
partners
Value
Cluster

“The efficiency of
the Internet
makes selecting
and purchasing
your car easier”

“Provides a onestop source with all
the necessary
information to
make a car
purchase”
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Marketspace offering
The next step is to articulate the online product, service and information offering:
Value Cluster
Defining the Marketspace offering requires
managers to complete the following
sequential tasks:
Marketspace Offering
• Identify the scope of the offering
• Identify the customer decision process
Resource System
• Map the offering to the consumer
decision process
Financial Model
Copyright © 2003 Sherif Kamel
Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Scope of the offering
The scope of the offering refers to the number of categories of products and services offered
on the site:
Continuum of Scope
Category-Specific Dominance
Focus on one product category
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Cross-Category Dominance
Focus on a large number of categories
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Metamarkets
The term ‘metamarkets’ refers to sites that group products and services that are closely
related in the mind of customers:
BabyCenter.com offers a good example
of a “goal-derived” metamarket. The site’s
products and information focus on one
goal: raising a healthy child.
• Shopping for baby and maternity products
• Support community for parents
• User personalization
• Reference information
• Support and help from experts
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Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Customer decision process
The second step in the construction of the online offering is the articulation of the customer
decision process for the various product categories:
Flowers Example
Pre-purchase
Purchase
Problem recognition

Need recognition, potentially triggered by a
holiday, anniversary or everyday events
Information search

Search for ideas and offerings, including:
– Available online and offline stores
– Gift ideas and recommendations
– Advice on selection style and match
Evaluation of alternatives

Evaluation of alternatives along a number of
dimensions, such as price, appeal, availability, etc.
Purchase decision

Purchase decision
Message selection (medium and content)

Satisfaction

Post-sales support
– Order tracking
– Customer service
Loyalty

Education on flowers and decoration
Post-sale perks
Postpurchase

Disposal
Copyright © 2003 Sherif Kamel
Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Mapping the offering to the decision process
The last step in the construction of the online offering is mapping the products and services
onto the customer decision process:

What occasions trigger the need
for my product? What tactics can
be used to stimulate demand?
Need
Recognition

Search for
Ideas and
Offerings

What post-sale
services can the
website offer to
create loyalty?
Customer
Decision
Process
Post-Sale
Support and
Perks
Evaluation of
Alternatives
Purchas
e
Decision

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What functionality should the
site present to communicate
privacy, trust and security?
What information would
the consumer need to
make a selection?

What are the key evaluation criteria
that the consumer will use to evaluate
my product/service? What information
should the website offer to make the
consumer comfortable with his or her
choice?
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Copyright © 2002 Marketspace LLC
Resource system
The third step is to define the resource system and how the company must align it to deliver
the benefits in the value proposition:
Value cluster
Marketspace offering
A series of activities is required to construct
a resource system:
1. Identify core benefits in the value
cluster.
Resource system
2. Identify capabilities that relate to each
benefit.
3. Link resources to each capability.
Financial model
4. Identify to what degree the firm can
deliver each capability.
5. Identify partners who can complete
capabilities.
Copyright © 2003 Sherif Kamel
Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Step #1 — Identify core benefits
The core benefits must be identified in the construction of the value cluster:
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 its strong brand name, product and media partnerships
and bricks-and-mortar network of franchises.
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Broad
Assortment
of Gifts
High
Quality of
Flowers
Customer
Service
Widesprea
d, Easy
Access
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Step #2 — Link capabilities to benefits
Managers need to identify which capabilities are required to deliver each benefit, regardless
(at this point) of the ability of the company to access or develop that capability:
For 1-800-Flowers.com, the benefit “widespread, easy access” is linked to four capabilities: strong brand
name, wide reach to customers, multiple points of contacts and a popular website.
Broad
Assortment
of Gifts
High
Quality of
Flowers
Popular Website
Multiple Contact
Points
Customer
Service
Widespread
, Easy
Access
Wide Reach to
Customers
= Core benefits
= Capabilities
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Strong Brand
Name
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Step #3 — Link resources to capability
After the capabilities are identified, the firm should determined the resources necessary to
deliver each capability:
Broad
Assortment
of Gifts
High Quality
of Flowers
Popular
Website
Telephone
3,000 Affiliates
Multiple
Contact
Points
Online
Franchis
e Stores
Catalog
Customer
Service
= Core benefits
Widespread,
Easy
Access
Wide Reach
to Customers
Strong Brand
Name
= Activities & assets
= Capabilities
Copyright © 2003 Sherif Kamel
Copyright © 2003 Thomson Learning/South Western
Copyright © 2002 Marketspace LLC
Steps #4-5 — Ability to deliver capabilities
The next steps assess whether the company has all the necessary capabilities in-house or if it
has to look outside and select the most appropriate partners to complete the missing
capabilities.
1-800-Flowers.com would not be able to deliver the capability “wide reach to customers” alone, and
therefore would need to create partnerships. Companies like MSN, AOL and Snap are potential partners.
Broad
Assortment
of Gifts
High
Quality of
Flowers
Popular
Website
Multiple
Contact
Points
Starmedia
Customer
Service
Widespread
, Easy
Access
AOL
= Core benefits
= Activities & assets
= Capabilities
= Partners
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MSN
Wide Reach
to Customers
Snap
Strong Brand
Name
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Type of financial models
A variety of financial models can be used to assess the value of the business model that
follows from the resource system. Three examples are:
Revenues
Models
• Identify the flow
of cash into the
organization
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Shareholder
Value Models
• Assess how the
company intends
to generate cash
flow or
shareholder value
Growth
Models
• Assess how the
company will be
able to drive
revenue growth
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Revenue models
While firms can pursue a number of revenue models, some are used most frequently:
Advertising
• Advertising revenues can be generated through the selling of ads, site sponsorships, event
underwriting, etc. (e.g., Yahoo, AOL, Business2.com)
Product, Service, Information
• Revenues can be generated from the sales of goods and services (e.g., Amazon, CDNow,
Buy.com)
Transaction
• Revenues can be accrued from charging a fee or taking a portion of the transaction sum for
facilitating a customer-seller transaction (e.g., Schwab, eBay)
Subscription
• Website can gain revenues by offering subscription services for information
(e.g., www.FT.com, www.NYTimes.com)
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Copyright © 2003 Thomson Learning/South Western
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Porter strategy model
Key concepts:
•
There are only three basic strategies
•
Each implies a different business model
•
Firms can pursue only one strategy at the time
Possible Strategies
Differentiation
Cost
Niche
Business
Model
• Requires constant
innovation and
leadership on the
benefits that matter
most to the customer
• Focus on gaining
competitive advantage
on costs while
maintaining parity
level on differentiation
• Focus the business
on a particular
segment of the market
and then pursue either
differentiation or cost
strategy
Networked
Economy
Example
• www.Travelocity.com
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• www.Lowestfare.com
• www.Lastminute.com
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eBusiness changes - basis of competition
1980s… Company vs. company
1990s…Supply chain vs. supply chain
2000s+…Business model vs. business model
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eCommerce environment
International
Macro-Environment
Economic factors
Legal constraints
Cultural factors
Micro-Environment
Technology
Society
Innovation
Trends
Public opinion
Moral constraints
Ethical constraints
Organization
Country Specific
Suppliers
Competitors
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Economic factors
Legal constraints
Cultural factors
Intermediaries
Customers
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B2B business models
Business models and marketplace control
1. Suppliers
2. Customers
3. Intermediaries
Other business models
1. Virtual corporation
2. Networking between headquarters and subsidiaries
3. Online services to business
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1. Supplier-oriented marketplace
Most common B2B business model.
Environment for most of over 85% of the
manufacturer-driven electronic stores.
Individual consumers and business buyers use the
model.
Architecture is the same for B2C.
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Supplier-Oriented B2B/B2C marketplace architecture
Consumer
Consumer
Business
Customer
Supplier’s
Electronic Store
Supplier’s
Products
Catalog
Customer’s
Order
Information
Business
Customer
B2C EC
B2B EC
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Cases
Dell Computers sold 90% of their computers to business
buyers over the Internet.
Cisco sold 1 billion US dollars worth of routers, switches
and network interconnections devices in 1998 through
the Internet.
Need to have a good and dynamic web site and a group
of loyal customers.
The model is not convenient to large and frequent
buyers.
Information stored on the suppliers servers and not on
the buyer’s information system.
B2B and B2C platforms differ in terms of shopping cart
characteristics.
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Case: www.ingram.com
Computer Reseller Ingram Micro.
Open only to existing and subscribed customers.
Building loyalty with its frequent buyers.
Sellers get rid of surplus goods and buyers are offered
huge discounts.
Percentage of gain could be 600% more than offline
auctions, on average.
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www.ingram.com
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2. Buyer-oriented marketplace
Ideal for large and frequent buyers.
Big buyers should open their own marketplace.
The marketplace is open on the buyer’s servers and
suppliers are invited to bid on the announced RFQs.
Great opportunity for competitive and committed
suppliers.
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Buyer-oriented B2B marketplace architecture
Business
Supplier
Buyer’s
Electronic Store
Business
Supplier
Buyer’s
Requesting Products
Catalog
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Supplier’s
Bid Information
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Cases
GE and Boeing are good examples.
It is becoming to be known as tender sites.
Introduction of online directories listing all RFQ sites.
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www.ge.com
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www.boeing.com
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Cases
Boeing’s PART, www.procure.net, www.manufacturing.net and
www.industry.net
PART links Boeing to 300 key suppliers of its maintenance parts.
www.procure.net
– Targets maintenance, repair and operations purchases
– Online since 1996 with 30 seller sites and 100,000 products listed in electronic
catalogs.
– 1 million hits per month.
– No registration, but only firms with validated information can buy from the
seller sites.
www.industry.net has over 275,000 members from 36,000
organizations (1998).
10,000 visitors daily directed to 53 seller sites.
www.industry.net charges between 2,500 and 250,000 US dollars for
the online catalog searching.
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3. Intermediary-oriented marketplace
The market place where consumers and business
buyers meet.
Architecture is very close to that in the B2C cases.
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Intermediary-oriented B2B marketplace model
Intermediary’s
Electronic Store
Business
Supplier
Business
Customer
Business
Supplier
Business
Customer
Customer’s
Order
Information
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Shared
Product
Catalog
Supplier’s
Product
Information
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www.techsavvy.com
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www.travelocity.com
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Virtual corporation
The most up-to-date re-engineered form of
organizational structure = Virtual Corporation.
Typical organization with business partners sharing costs
and resources for the purpose of producing a product or
service.
Mainly dependent of B2B platforms.
Modern VC is a network of creative people, resources,
and ideas connected by online services and/or the
Internet.
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Virtual corporation goals
Excellence
Utilization
Opportunisim
Each partner brings its
core competence to
form an all-star
winning team
Resources of the
business partners are
frequently under utilized,
could be more profitable
in the case of a VC
VC can find and meet
market opportunity
Better than an
individual company
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B2B platform for virtual corporation
Electronic mail
Desktop video conferencing
Knowledge sharing
Groupware
EDI
EFT
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Networking between headquarters and subsidiaries
Franchiser vs. Franchisee
Electronic mail
Message boards
Chat rooms
Online corporate data access
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www.marriott.com
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Case: Marriott Hotels
Marriott as a chain has 1,500
hotels worldwide in 50
countries.
600 of which = 40% are
franchisee.
Revenues in 1998 = 10 Billion
US Dollars.
Marriott went online in 1995
(Internet-based).
www.marriott.com receives
orders worth 3 million US
Dollars monthly.
Company intranet for 20,000
employees becoming extranet
between all franchisee.
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B2B and the supply chain
B2B applications consist of a series of processes and
roles that represent the supply chain of a specific product
and/or service.
External operations with partners outside the
organization are as important as the interaction between
the units within the organization.
Raw
material
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Supply Chain Process
End-user
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Supply chain divisions
Upstream Activities
Involving material
and service inputs
from suppliers
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Internal Activities
Involving
manufacturing and
packaging of goods
Downstream Activities
Involving distribution
and sale of products
to distributors and
customers
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B2B insights
Backbone = Supply Chain Management
It represents the coordination or order generation, order taking,
and order fulfilment and distribution of products, services and
information
Contribution = Customers + Suppliers
Lower purchase costs
Reduced inventory
Enhanced efficiency of logistics
Increased sales
Lower sales and marketing costs
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B2B
B2Bcomponents
components
Selling = electronic marketing
Purchasing = procurement management
Electronic Intermediary = service provider
Delivery = JIT
Network Platform = internet/intranet/extranet
Communication Protocol = EDI
Back-End IS = ERP systems
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Online services to business
Famous online services include:
Tourism
Employment placement/job market
Real state
Trading stocks
Cyber banking
Insurance
Auctions
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It is important to note that…
There are 2 categories of internet businesses
Pure play
– Businesses having only an online presence


www.amazon.com
www.ebay.com
Bricks and clicks
– Businesses combining online presence with traditional offline
operations.



www.bn.com
www.nordstrom.com
www.nytimes.com
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B2C pure-play business models
Direct sellers
Make money by selling products or services to consumers.
Intermediaries
Facilitate transactions between buyers and sellers and receive a
percentage of the value of each transaction.
Advertising-based models
Have ad inventory on their site and sell it to interested parties.
Community-based models
allow users worldwide to interact with one another on the basis of
interest areas.
Fee-based models
charge viewers a subscription fee to view content.
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Bricks-and-clicks business model
For some product categories, individuals have to touch,
feel, or try on a product before buying.
Delivering products is a hassle for dot-coms.
Product returns can be tricky.
Salespeople can help customers by answering product
questions, providing feedback, and suggesting other
products.
Spin off the online venture.
Create a strategic partnership.
Create a joint venture between a bricks-and-mortar store
and an online company.
Integrate the online operation with the existing physical
operation by creating a division within the company.
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B2B pure-play business models
Business markets are unique in many ways:
High value of purchases
Large order size
Items purchased
Purchase specificity
Team buying
Use of buying specialists
Special services required
Team selling
Vendor/value analysis
Leasing
Competitive bidding
Derived demand and cyclical demand
Number and location of buyers
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B2B pure-play business models
EDI and Extranets
EDI
– Created on a closed network—systems did not speak to one another.
Extranets
– An intranet that is adapted so that external parties are provided
varying degrees of access to information.
B2B marketplaces—net markets
Broadly described as all online marketplaces where buyers and sellers
congregate to exchange goods and services for money.
Net markets can be organized either horizontally or vertically.
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B2B pure-play business models
Types of net markets…
1. Buy-centric markets are organized by large, influential buyers as
a place where small and fragmented sellers can sell their goods.
2. Sell-centric markets are markets where one or more big sellers
build a marketplace for small, fragmented buyers.
3. Neutral exchanges appear when both the sellers and the buyers
are fragmented.
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B2B pure-play business models
Why do use net markets?
Selection of buyers or sellers (global markets) is greater.
Dynamic markets may be a great place to move inventory quickly.
Efficient exchange process minimizes employee time.
Prices are low due to expanded access to sellers.
Some one-time deals are available only to online audiences.
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B2B pure-play business models
Challenges faced by eMarketplaces…
Building traffic is a big challenge for eHubs.
Competing eMarketplaces.
Integrating other sales channels with eMarketplaces.
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Incorporating the Internet/Web for more effective business
Steps include…
1.
2.
3.
4.
Business assessment
Delivering value to the consumer
Define revenue model
Implementation
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Step #1: Business assessment
Digitality and profit orientation
Digitality
– The digitality of a business is the proportion of a business that is
online.
Profit orientation
– Each company must determine whether its online operation is a
service to consumers or if it will provide income for the organization.
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Step #2: Delivering value to the consumer
Value
A consumer’s perception of the consequence of using a product
or service in relation to prior expectations.
Steps to deliver value include…
1. Identify how different consumers perceive value.
2. Choose which value elements will be delivered.
3. Provide the value—build the business in such a way that it
manifests the desired elements.
4. Develop an integrated communications package to help
customers learn about the nature of the value.
5. Assess how customers perceive the value being delivered.
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Step #2: Delivering value to the consumer
Value drivers in physical versus virtual spaces…
Physical space value drivers – the 4 Ps
–
–
–
–
Product
Price
Place
Promotion
Virtual space drivers – the Internet toolkit
–
–
–
–
–
–
–
Commerce
Communication
Cost reduction
Connectivity
Community
Content
Computing
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Step #3: Define revenue model
Ways to maximize profits.
1. Commerce - Selling products or services to consumers or
businesses.
2. Advertising - Selling advertising space to interested advertisers.
3. Fees - Charging fees to consumers for various services.
4. Sale of consumer information - Aggregating consumer behavior
information and selling it to interested companies.
5. Credit - Receiving money from the consumer on day 1 and
paying vendors after a long period of time (float).
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Step #3: Define revenue model
eBusiness typically have intangible and informational
assets.
One of the primary benefits of the Internet is the ease of
linkage between firms.
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Step #4: Implementation
Internet time
Higher visibility of errors
Lower switching costs
More complex linkages
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Step #4: Implementation
Why CRM systems fail?
Losing sight of why the CRM system is being implemented.
Not having a clear sponsor who owns the vision.
Underestimating the difficulties of integration.
Why CRM systems succeed?
Allocate adequate resources.
Provide incentives for business units to collaborate.
Consider the activities of both online and offline competitors.
Build an Internet culture.
Allow customer input to drive design.
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