Chapter 2
Adopting appropriate
e-business models
Paula Goulding
Learning objectives
 What constitutes a business model
 Why understanding and articulating a
business model is vital to an organisation
achieving profitability and sustainability
 The essential components of a business
model, and some generic business models
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Learning objectives
 How managers can use business models
and the implications of business models for
managerial decision making and action
taking
 The relationship between business models
and organisational strategy
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Introduction
 Internet (& associated technologies) form
foundation of global communication &
information infrastructure
– transforming industries & changing way
business is conducted
 need to investigate new models of
business that effectively utilise potentiality
of Internet & associated technologies
– “gold rush” mentality of mid-late 1990s
serious search for frameworks/models to
analyse & define e-commerce landscape
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What is a business model?
 A business model is a description of how a
business works: its value chain, process
interactions, cost structure, and revenue
sources, how it will achieve profitability and
sustainability.
BUT the term ‘business model’ is becoming a buzzword,
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and thus routinely
misappropriated
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What is a business model?
 Why focus on business models?
– traditional, industrial age concept of how
business was conducted is very clear
I sell cars.
I work for an
insurance
company.
We understand:
* how business is structured
* types of people/skills needed
* roles filled
* how business makes money
* how business delivers value to
customers, suppliers, partners, owners
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What is a business model?
 Internet “disrupts” our understanding &
presents new possibilities/potentialities
– new (additional) channel for procuring &
distributing goods & services
– highly interactive with new capabilities
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What is a business model?
 new business models needed to shape
business practices in new business
environment
– Value proposition (value delivered to
customers), capabilities, sources of costs &
revenues are generally less familiar & obvious,
& therefore need further analysis & articulation
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What is a business model?
 Function of Business Models
– Articulate value proposition
 Value created for customers by goods/services (via
use of technology)
– Identify market segment
– Define structure of internal value chain required
to create & distribute offering
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What is a business model?
 Function of Business Models
– Consider cost structure and profit potential,
given value proposition and value chain
structure
– Describe position of firm within value network
– Formulate competitive strategy
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What is a business model?
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Customer management
 Embraces a number of aspects associated
with customers & relationships that
organisation maintains with customers
– Customer identification
 Which customer segment(s) do we serve? Are our
customers organisations or end consumers?
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Customer management
– Value proposition
 Defines & describes the value an organisation
delivers to its customers
 Stems from perceptions of customers as to what is
important
– Understanding & servicing customer
requirements
– Developing brand awareness
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Product & service portfolio
 What portfolio of products and/or services
and/or experiences does an organisation
offer its customers?
– Broad or narrow range?
– Stand-alone or tightly integrated?
 Where on the product lifecycle are an
organisation’s products, services and
experiences?
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Product & service portfolio
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Product Portfolios
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Processes & activities
 What core business processes and activities does
an organisation require in order to deliver the
value proposition to its customers?
– How should a business be configured?
 Do these processes and activities imply a need to
develop external linkages to ensure delivery of
value proposition, or can/should they be
performed internally?
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Resources, capabilities & assets
 What resources, capabilities, assets
do we need to deliver value
proposition?
– In-house or outsource?
 How do we recruit & train human
resources needed for success?
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Suppliers & Business
Networks
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Suppliers and
Business Networks
 Do we need close relationships with other
organisations in order to deliver the value
proposition to customers?
 How to find & manage the resultant strategic
business network (SBN)?
 Will SBN enhance our ability to be responsive,
flexible, agile in changing & competitive
environment?
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Financial Viability
 Profitability & sustainability
– Incoming revenues must exceed costs
over time
– Typically costs are incurred before
revenues are received
– Challenge is to manage cash flows to
ensure sustainability
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Financial Viability
 Sources of revenues?
– Selling goods, services
– Selling advertising space, sponsorship
– Commissions, subscription fees
 When will revenues be generated?
– How moneys apportioned across SBN?
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Financial Viability
 Costs
– Identify total costs (all costs associated with design,
developments and/or procurement of goods & services,
and all costs incurred in delivering on value proposition
of customers)
– Where are costs incurred?
– Understanding costs is essential to establishing pricing
mechanisms & policies
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Financial Viability
 Risk considerations
– What assumptions are being made about revenues
streams, costs, sales volumes? With what degree of
uncertainty?
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Financial Viability
 Established price customers are willing to pay?
 When are goods / services expected to be
profitable?
 Have all costs been identified? All revenues?
Opportunities to leverage knowledge, technology
or physical assets?
 Has risk been considered?
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Examples of business models
 Importance of business models
– A good business model does not guarantee success
– Must be implemented via appropriate strategies &
effectively managed
– Provides a coherent framework for managers to think
about elements of business & to avoid overlooking
elements critical to success
– Given 6 elements, there are many ways of combining
these to form organisational blueprints
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Examples of business models
 Direct-to-Customer model
– Basis of commercial transactions over the
Internet
 Describes process of selling direct to customer via
organisational website
 Incorporates both supply-oriented transactions
(organisation is in role of buyer) & demand-oriented
transactions (organisation is in role of seller)
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Examples of business models
Direct-to-Customer model
Place, and/or space
S
Communicate directly
* wholesaler (Ingram books)
* retailer
(Wal-Mart)
* producer
(Gillete, Nike)
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B
* individual
* business
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Examples of business models
 Direct-to-Customer model
– Customer management
 Does moving online increase potential market, or does it
cannibalise existing market?
 Does online service increase satisfaction & loyalty?
 What is the customer value proposition? How is it enhanced or
supported through moving online?
– Product & service portfolio
 Are an organisation’s goods & services suited to selling online?
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Examples of business models
 Direct-to-Customer model
– Processes & activities
 Need for excellent order fulfilment & delivery
 Are new processes & activities implied by the move online?
 Is there a risk of channel conflict as a result of moving online?
– Resources, capabilities, assets
 Required IT capabilities?
 Warehousing, logistics capabilities for online trading?
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Examples of business models
 Direct-to-Customer model
– Suppliers & business networks
 Alliances needed with external providers of components of the
value proposition?
 Skills needed to form and manage relationships?
– Financial viability
 Sources of revenue (online sales, selling advertising space,
referrals?)
 Sufficient financial resources for investments in IT & systems
integration?
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Examples of business models
 Intermediary model
– An intermediary serves to mediate transaction
between buyer(s) and seller(s)
– Role of intermediary varies according to
circumstances
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Examples of business
models
Intermediary model
S
S
S
* individual
* business
Communicate indirectly
I
Intermediaries:
*broker / infomediary
*auction
*portal
*B2B marketplaces
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B
B
B
* individual
* business
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Examples of business models
 Intermediary model
– Types of intermediaries
 Broker or infomediary
 Auctions
 Portals
 Marketplaces or hubs
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Examples of business models
 Intermediary model
– Customer management
 Understanding range of services required of intermediary &
valued by customers is essential to success
 Recognise potential for conflict between desires of buyers and
needs of sellers
– Product & service portfolio
 Intermediary model often involves services only
 ‘value’ attached to services must be capable of generating a
stable source of revenue
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Examples of business models
 Intermediary model
– Processes & activities
 Need for excellence in gathering and managing
information & knowledge (about buyers & sellers
requirements, about industry, about range of
products & services, etc)
 Excellence in integrating processes of buyers and
sellers required
– Resources, capabilities, assets
 May be providing infrastructure to trading parties
 Must be structured to allow intermediary to retain
control of transactions
 May require integration across organisational
boundaries
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Examples of business models
 Intermediary model
– Suppliers & business networks
 May require extensive use of business networks &
alliances (e.g. portals)
 Need to make decisions about which services
provided internally as opposed to external providers
– Financial viability
 Revenue streams from transaction fees,
subscription fees, provision of online content,
advertising
 Major costs stem from building robust infrastructure
& marketing
 Must achieve critical mass of buyers and sellers to
ensure transaction volume and future viability
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Examples of business models
 Content Provider model
– provides content based on expertise, on-sold to third
parties, or made available free of charge (e.g. weather
forecasts, news)
– Revenues generated through sales of content, or
through selling advertising space on popular sites
– often a variant of Direct-to-Customer model
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Implications for managers
 Simple framework of business models
helpful for enhancing understanding and
dialogue among managers
– Serves to align organisational members to
organisational mission
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Implications for managers
 Sound, coherent, articulated business model
essential for any business
– Must be complemented by strategy that takes into
account competition, industry forces & the like
 Business model defines what an organisation is all
about, what is does, how it makes money
– Strategy articulates how it will achieve goals and targets
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Implications for managers
 But…
– Different researchers & writers do not
always approach the concept of a
business model in a similar way…
– Consider the views of:
 Harvard Business School (Applegate)
 Aust. Graduate School of Management (Weill &
Vitale)
 Gartner group (Taylor & Terhune)
 Eisenmann (Harvard – 2002)
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References
Weill, P. and Vitale, M.R. (2001) Place to
Space: Migrating to e-Business Models.
Harvard Business School Press, Boston.
Eisenmann, T.R. (2002) Internet Business Models: Text
and Cases. McGraw-Hill Irwin, Boston.
Taylor, D. and Terhune, A.D. (2001) Doing e-Business.
Wiley, New York.
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