CHAPTER 7
NEW BUSINESS MODELS
AND STRATEGIES FOR
THE INTERNET ECONOMY
Screen graphics created by:
Jana F. Kuzmicki, PhD, Mississippi University for Women
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“If you are going to be in E-commerce,
you have to build a business that
destroys the old brick-and-mortar model.”
John B. McCoy
“There will be thousands of winners on
the Internet. But there there will be only
a very few really big winners.” “Quote”
Mary G. Meeker
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Chapter Outline
 Internet Technology and Market Structure
 Strategy-Shaping Characteristics of the E-
Commerce Environment
 E-Commerce Business Models and Strategies
 Internet Strategies for
Traditional Businesses
 Innovative Business Models
and Fast-Evolving Strategies
are KSFs in E-Commerce
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Impact of the Internet and E-Commerce
 Impact on external industry environment
 Changes character of the market
and competitive environment
 Creates new driving forces
and key success factors
 Breeds formation of new strategic groups
 Impact on internal company environment
 Having, or not having, e-commerce capabilities
tilts the scales toward valuable resource
strengths or threatening weaknesses
 Creatively reconfiguring the value chain will affect
a firm’s competitiveness vis-à-vis rivals
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Characteristics of Internet
Market Structure
 Internet is composed of
 Integrated network of users’ connected
computers
 Banks of servers and high-speed computers
 Digital switches and routers
 Telecommunications equipment and lines
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Supply Side of the Internet Economy
 Major groups of Internet and e-commerce firms
comprising the supply side include
 Makers of specialized communications
components and equipment
 Providers of communications services
 Suppliers of computer components and
hardware
 Developers of specialized software
 E-commerce enterprises
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Business-to-business merchants
Business-to-consumer merchants
Media companies
Content providers
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Strategy-Shaping Characteristics
of the E-Commerce Environment
 Internet makes it feasible for companies
everywhere to compete in global markets
 Competition in an industry is greatly intensified
by new e-commerce strategic initiatives of
existing rivals and by entry of new, enterprising
e-commerce rivals
 Entry barriers into e-commerce world are
relatively low
 On-line buyers gain bargaining power
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Strategy-Shaping Characteristics of the
E-Commerce Environment (continued)
 Internet makes it feasible for firms to reach
beyond their borders to find the best suppliers
and, further, to collaborate closely with them to
achieve efficiency gains and cost-savings
 Internet and PC technologies are advancing
rapidly, often in uncertain and unexpected
directions
 Internet results in much faster diffusion of new
technology and new ideas across the world
 E-commerce environment demands that firms
move swiftly - “at Internet speed”
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Strategy-Shaping Characteristics of the
E-Commerce Environment (continued)
 Internet and e-commerce technology open up a
host of opportunities for reconfiguring industry
and company value chains
 Internet can be an economical means of
delivering customer service
 Capital for funding potentially profitable e-
commerce businesses is readily available
 Needed e-commerce resource in short supply is
human talent, in the form of both technological
expertise and managerial know-how
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Effects of the Internet and E-Commerce
 Can produce important shifts in an industry’s
competitive forces
 Alters industry value chains, spawning
substantial opportunities for increasing
efficiency and reducing costs
 Affects a company’s resource
strengths and weaknesses
 Rapid pace of technological change
with an often uncertain direction
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Overview of E-Commerce
Business Models and Strategies
 Provide new opportunities to put  Offer potential to exploit
a globally-connected Internet
infrastructure in place
 Build out
telecommunications system
 Install millions of servers
 Provide high-speed Internet
connections to billions of
businesses and households
 Develop software and
networks to create a wired
global economy
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business opportunities in a
globally wired e-commerce
environment
 Business-to-business
sales
 E-procurement
 Business-to-consumer
sales
 E-retailing
 Provide content
 Provide services to users
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Business Models: Suppliers of
Communications Equipment
 Traditional business model of a manufacturer is
being used by most firms to make money
 Sell products to customers at prices above
costs
 Produce a good return on investment
 Strategic issues facing equipment makers
 Several competing technologies for various
components of the Internet infrastructure exist
 Competing technologies may
 Have different performance
pluses and minuses
 Be incompatible
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Strategy Options for Suppliers of
Communications Equipment
 Invest aggressively in R&D to win the
technological race against rivals
 Form strategic alliances to build consensus for
favored technological approaches
 Acquire other companies with complementary
technological expertise
 Hedge firm’s bets by
investing sufficient resources
in mastering one or more of
the competing technologies
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Business Models: Suppliers of
Communications Services
 Business models are based on profitably selling
services for a fee based on a flat rate per month or
volume of use
 Firms must invest heavily in extending lines
and installing equipment to have capacity to
 Provide desired point-to-point service and
 Handle traffic load
 Investment requirements are particularly heavy
for backbone providers, creating sizable up-front
expenditures and heavy fixed costs
 Key to success - Establish networks ahead of
rivals to get in position to sign up customers
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Business Models: Suppliers of
Communications Services (continued)
 Fierce competition has emerged among “last mile”
providers selling high-speed Internet access
 Strategic options
 Provide high-speed (broadband) Internet
connections using new digital signal line
technology
 Provide wireless broadband services
or cable Internet service
 Bundle local telephone service, long distance
service, cable TV service and Internet access into
a single package for a single monthly fee
 Key strategic weapons for last mile providers -
Name recognition and advertising
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Business Models: Suppliers of
Computer Components and Hardware
 Traditional business model is used - Make money
by selling products at prices above costs
 Strategic approaches
 Stay on cutting edge of technology
 Invest in R&D
 Move quickly to imitate technological advances
and product innovations of rivals
 Key to success - Stay with or ahead of rivals
in introducing next-generation products
 Competitive advantage will most likely be
based on strategies keyed to low-cost
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Business Models: Developers of
Specialized E-Commerce Software
 Business model involves
 Investments in designing and developing
specialized software
 Marketing and selling software to other firms
 Profitability hinges on volume
 Strategic approaches
 Sell software at a set price per copy
 Collect a fee for every transaction provided by
the software
 Rent or lease the software
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Business Models: E-Commerce Retailers
 Sell products at or below cost and make money by
selling advertising to other merchandisers
 Use traditional model of
 Purchasing goods from
manufacturers and distributors
 Marketing items at a Web store
 Filling orders from inventory at a warehouse
 Operate Web site to market and sell
product/service and outsource manufacturing,
distribution and delivery activities to specialists
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Strategic Approaches:
E-Commerce Retailers
 Spend heavily on advertising to build widespread
brand awareness, draw traffic, and start process of
developing customer loyalty
 Add new product offerings to help
attract traffic to firm’s Web site
 Be a first-mover or at worst an early mover
 Pay consideration attention to Web site
attractiveness to generate “buzz” about the site
among surfers
 Keep Web site innovative, fresh, and entertaining
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Business Models: Suppliers of
E-Commerce Services
 Key strategic issue for e-commerce retailers -
Handling warehousing and delivery activities
 Firms are using services of “Internet middlemen” to
efficiently sort all the supplier choices
 Firms are using focus strategies to zero in on specific
niches, pursuing competitive advantage based on
 First-mover mastery of a particular technology
 Product superiority
 Unique product attributes
 Convenience and ease of use
 Speed
 More value for the money
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Business Models: Media Companies
and Content Providers
 Using intellectual capital to develop music, games,
video, and text, media firms
 Charge subscription fees or
 Rely on a pay-per-use model
 Business model of content providers involves
creating content to attract users, then selling
advertising to firms wanting to deliver a message
 Key success factors for content providers
 Create a sense of community
 Deliver convenience and entertainment value as
well as information
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Internet Strategies for
Traditional Businesses
 Use Internet technology to communicate and
collaborate closely with suppliers and
distribution channel allies
 Reengineer company and industry value chains
to revamp how certain activities are performed
and to eliminate or bypass others
 Make greater use of build-to-order
manufacturing and assembly
 Build systems to pick and pack
products that are shipped individually
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Internet Strategies for
Traditional Businesses (continued)
 Use Internet to give both existing and potential
customers another choice of how to interact
with the company
 Adopt Internet as an integral distribution
channel for accessing new
buyers and geographic markets
 Gather real-time data on customer tastes and
buying habits, doing real-time market research,
and use results to respond more precisely to
customer needs and wants
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Key Success Factors: Competing in
the E-Commerce Environment
 Employ an innovative business model
 Develop capability to quickly adjust business model
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and strategy to respond to changing conditions
Focus on a limited number of competencies and
perform a relatively specialized number of value chain
activities
Stay on the cutting edge of technology
Use innovative marketing techniques that
are efficient in reaching the targeted audience
and effective in stimulating purchases
Engineer an electronic value chain
that enables differentiation or lower
costs or better value for the money
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