ebusiness models

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e-business models
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Encyclopedia Britannica

• 1768 first encyclopedia in the English-speaking
  world
• Worlds most comprehensive and authoritative
  encyclopedia
• Aggressive sales and marketing
• Target middle-income families and their
  aspirations for their children
• 1990 sales of 650 million
• Dominant market share, steady growth generous
  margins
• Since 1990, sales have collapsed by over 80

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What happened?

• Britannica viewed the CD-ROM as a toy
• Microsoft licensed content from Funk Wagnalls
• Third-rate content, poor quality sound and images
• Not serious competition (?)

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Britannicas Response

• Britannica considered marketing the product on
  CD-ROM
• Britannica was too large to fit on a CD-ROM
• Britannica marketed text-only CD-ROM
• Sales force revolted because of losses in
  commission
• Bundled CD-ROM free with encyclopedia to avoid
  channel conflict
• CD-ROM alone sold for 1,000
• May 1995 Britannica sold for half its book
  value

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Britannica

• Market research showed that the typical
  encyclopedia is opened once a year
• Sales force played on parents anxieties about
  their childrens education
• Now a PC is the most common way of easing
  parental guilt
• Incumbents are saddled with legacy assets
• Sales and distribution systems, brands, core
  competencies
• Competing in the digital economy may mean
  cannibalising these assets or destroying them

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Moral

• New Economics of Information
• Evolving technological capabilities for sharing
  and using information can transform business
  definitions, industry definitions and competitive
  advantage e.g. Napster
• IT can destroy brands and businesses
• Britannicas vulnerability was due to its
  dependence on the economics of intense personal
  selling (sales force)
• Implications for real estate, insurance, cars,
  travel

Evans and Wurster (1997) Strategy and the New
Economics of Information, Harvard Business
Review, Sept-Oct
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e-Business Model Research Context

• MSc Research began October 2000
• Dot.com implosion circa Spring 2000 (Howcroft,
  2001)
• Pure-play dot.coms e.g. Boo, eToys
• Clicks and Mortar e.g. WorldOfFruit.com
• Initially the research focused on surveying the
  landscape an empirical analysis, contrast to
  the mainly qualitative research available at the
  time

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Electronic Business Today

• e-commerce is no longer an alternative, but an
  imperative
• Landscape confusing for new entrants
• B2B segment is considerably larger 4-13 times
  the size of B2C
• B2B sector was expected to be worth 1.3 trillion
  in 2003
• Coltman (2001) hype pre-dot.com collapse, but
  new era of pessimism is an overreaction

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e-Business Model

• an architecture for product, service and
  information flows (Timmers, 1999)
• most discussed and least understood part of the
  web (Rappa, 2000)
• Ticoll et al (1998) 4 models
• Kaplan and Sawhney (2000) 4 models
• Timmers 11 models
• Rappa 30
• Osterwalder (2002) misuse of term led to loss
  of credibility of the concept

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Why are e-business models important?

• Internet alters industry structures
• Channel cannibalisation
• Myths that old rules about business are
  obsolete are widespread
• Led to bad decisions
• Move from competitive advantage based on quality,
  service features to competition based only on
  price (Porter, 2001)
• Need for appropriate e-business model so a firm
  can identify where it is positioned in the value
  chain (Rappa, 2003)

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Boo.com

• Fashion e-tailer
• Strong focus on brands, not a discount seller
• First-mover advantage
• Allowed company to raise substantial investment
  capital
• Porter (2001) argues that this is a myth
• Launched simultaneously in a number of
  territories
• Multiple currencies
• Multiple languages
• Varying tax-laws

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Boo.com

• At peak in 1999, company valued at 450m
• Burned 200m in 18 months
• major investors were JP Morgan, Goldman Sachs,
  and the Benetton Family
• Technology Problems
• required Flash plug-in, did not support Macintosh
  users, required fast connection
• systems integration problems with logistic
  partners (UPS and Deutsche Post)

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Osterwalder (2002)

• Linder (2001) existing frameworks insufficient
  to describe array of business model choices
• Osterwalder and Pigneur (2002) e-business model
  ontology (formal specification of how to
  represent the objects, concepts and other
  entities that are assumed to exist and the
  relationships that hold among them)

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What is a Business Model? (Osterwalder, 2002)
Its the business logic of how a company makes
money in a sustainable way
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Business Models The Missing Link (Osterwalder,
2002)
STRATEGY
Business model
BUSINESS/ORG.
TECHNOLOGY
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Planning Level
Strategy
ICT Pressure
e-Business opportunities change
Architectural Level
Business Model
e-Business process and adaptation
Implementation Level
Business Processes
Business Logic Triangle (Osterwalder et al, 2002)
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E-business model ontology (Osterwalder et al,
2002)
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Business Model Decision

• Dynamic Environment (Mintzberg, 1979)
• Uncertain Supply Chain
• Rapidly Changing Technology
• Repeated Product Evolution
• Thus, organisation is unable to predict future
  conditions e.g. e-business model decision
• wrong choices could have dire consequencesbut
  need to act soon or risk being left behind (Wise
  and Morrison, 2000)

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Simons (1960) 4 Phases of Decision-Making

• Intelligence, Design, Choice, Review
• An examination of the milieu for situations in
  which a decision is required
• this phase is crucial, as alternatives not
  considered at this stage are very unlikely to be
  involved in the decision scenario at a later
  stage(Pomerol, 1994)

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Markets and Hierarchies

• Malone et al. (1987) argue that the ability of
  Information Technology to provide cheap
  connectivity, will result in a lowering of
  coordination costs, and therefore will result in
  a shift from hierarchies to markets

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Models - Timmers
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Models Kaplan and Sawhney
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Models Ticoll et al.
Open Source
Car manufacturer
Supermarket
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Successful Business Model (Afuah and Tucci)
High Customer Value Complementary Scope Control
over Pricing Defensible Sources of
Revenue Consistent Connected Activities Unique,
Inimitable Capabilities Excellent
Implementation Sustainability for the Future Low
cost Correct profit site
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Five Forces Model (Porter, 1980)
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Customer Value

• Differentiation
• Product features, timing, location, service,
  product mix, linkage between functions, linkage
  with other firms, reputation
• Low Cost
• Reduction in information asymmetry
• Reduced transaction costs
• Distribution channel

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Scope

• Market Segments/Geographic Areas
• Business Market
• Industry, Firm Size e.g. SMEs
• Households
• Demographics e.g iVillage
• Universality property of internet facilitates
  expansion
• Firm must decide how much of the needs of the
  segment it can serve

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Price

• Pricing strategy is crucial
• Knowledge-based products
• Market share and Margin
• Giving away a product and charging fpr later
  versions
• Giving away Product X and charging for related
  Product Y e.g. Adobe Acrobat
• Pricing low to penetrate the market

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Price

• Lock-In
• e.g. Microsoft Windows
• Switching costs
• Network Externalities
• The more users that own them, the more valuable
  they are to users

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Common Internet Pricing Models

• Menu (fixed)
• One-to-One Bargaining
• Subscription (pay by use)
• Auction
• Reverse Auction
• Other Revenue Sources include
• Advertising
• Referral Links

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The importance of Market Share(Afuah Tucci,
p58)
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The importance of Market Size(Afuah Tucci, p59)
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Revenue Sources

• Selling Products
• Selling Product and Service
• Connected Activities
• RD, Marketing and Sales
• Value Chain (value is added to materials or
  knowledge as it moves up the chain)

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Synthesis of Business models
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e-Business Model Characteristics
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Economic Control

• Items derived from Porters Five Forces model
• 5-point Likert Items (Strongly Agree.Strongly
  Disagree)

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Functional Integration

• Scale developed by adapting lists of functions
  from the modules of a leading ERP system
• Please indicate the extent to which the
  following are integrated with other processes and
  functions in the organization.
• Can opt out of responding to a particular item
  if business process/function is not relevant.

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Functional Integration

• 5-point Likert items (Not at all Integrated,
  Partially Integrated, Average Integration, Highly
  Integrated, Completely Integrated)

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Supply/Value Chain Integration

• Uses same list of functions as Functional
  Integration construct
• Please indicate the extent to which the
  following are integrated with processes and
  functions in other firms in the supply chain
  (i.e. customers and suppliers).

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Internal Technical Innovation

• 25 Likert scale items (strongly
  disagreestrongly agree)
• Constructs relative advantage, complexity,
  compatability, ease of use, image, result
  demonstrability, visibility, trialability

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External Technical Innovation

• Ability of the organisation to assimilate/adopt
  innovations
• Factors Competitive Price Intensity, Industry
  Concentration, Organisational structure (degree
  of centralisation)
• 5-point Likert scale (neverfrequently)

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Sourcing

• Identify degree of Spot and Systematic sourcing
  of both direct and indirect materials

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Operationalising the framework

• Scores from Likert items are used to give overall
  scores for each of the 5 organisational
  characteristics.
• These can then be compared with the score
  assigned to each business model.

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Methodology

• Field Study
• 5 manufacturing companies
• Semi-structured interviews administration of
  scales

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Case PackCo
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e-Business Model Characteristics
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PackCo Findings
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Conclusions

• Need for validation of scales through field study
  research in a larger number of organisations
• Need for alteration of some existing scales e.g.
  Supply chain integration, Internal and External
  Innovation
• Upstream and downstream issues e.g. Economic
  Control