adopting appropriate e-business models

Adopting appropriate e-business models

CK FarnApril 2006 (Rev)

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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 utilize potentiality of Internet & associated technologies

“gold rush” mentality of mid-late 1990s serious search for frameworks/models to analyze & 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

revenue sources

And how it will achieve profitability and sustainability.

BUT the term ‘business model’ is becoming a buzzword,and thus routinely misappropriated

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Why focus on business models?traditional, industrial age concept of how business was conducted is very clear

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

I work for an insurance company.

I sell cars.

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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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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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Business models defined…“an operating business model is the organisation’s core logic for creating value…since organisations compete for customers & resources, a good business model highlights the distinctive activities and approaches that enable the firm to succeed – to attract customers, employees, and investors, and to deliver goods & services profitably.”

(Linder & Cantrell 2000:2)

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Business Model defined… “a business model is nothing else than the

architecture of a form and its network of partners for creating, marketing and delivering value & relationship capital to one or several segments of customers, in order to generate profitable and sustainable revenue streams”

(Dubosson-Torbay et al. 2002:7)

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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 & dist8ribute offering

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Function of Business ModelsConsider 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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Cost Structure

VolumeLow High

Co

st

High

Low

Total Cost

VolumeLow High

Co

st

High

Low

Total Cost

Revenue

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Customer management

Embraces a number of aspects associated with customers & relationships that organisation maintains with customers

Customer identificationWhich customer segment(s) do we serve? Are our customers organisations or end consumers?

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Customer management

Value propositionDefines & 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 organiZation’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 & sustainabilityIncoming 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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CostsIdentify 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

Financial Viability

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Financial Viability

Risk considerationsWhat assumptions are being made about revenues streams, costs, sales volumes? With what degree of uncertainty?

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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?

Financial Viability

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Examples of business models

Importance of business modelsA good business model does not guarantee successMust be implemented via appropriate strategies & effectively managedProvides a coherent framework for managers to think about elements of business & to avoid overlooking elements critical to successGiven 6 elements, there are many ways of combining these to form organisational blueprints

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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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Place, and/or space

Communicate directly

* individual* business

* wholesaler (Ingram books)* retailer (Wal-Mart)* producer (Gillete, Nike)

S B


Direct-to-Customer model

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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 portfolioAre an organisation’s goods & services suited to selling online?


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Direct-to-Customer model Processes & activities

Need for excellent order fulfilment & deliveryAre new processes & activities implied by the move online?Is there a risk of channel conflict as a result of moving online?

Resources, capabilities, assetsRequired IT capabilities?Warehousing, logistics capabilities for online trading?


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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 viabilitySources of revenue (online sales, selling advertising space, referrals?)

Sufficient financial resources for investments in IT & systems integration?


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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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Communicate indirectly


S B


I


Intermediaries:*broker / infomediary

*auction*portal

*B2B marketplaces

B

B

S

S

Intermediary model

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Intermediary model Types of intermediaries

Broker or infomediary

Auctions

Portals

Marketplaces or hubs


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Intermediary model Customer management

Understanding range of services required of intermediary & valued by customers is essential to successRecognise potential for conflict between desires of buyers and needs of sellers

Product & service portfolioIntermediary model often involves services only‘value’ attached to services must be capable of generating a stable source of revenue


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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, assetsMay be providing infrastructure to trading partiesMust be structured to allow intermediary to retain control of transactionsMay require integration across organisational boundaries


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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 viabilityRevenue streams from transaction fees, subscription fees, provision of online content, advertisingMajor costs stem from building robust infrastructure & marketingMust achieve critical mass of buyers and sellers to ensure transaction volume and future viability


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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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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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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)

adopting appropriate e-business models

Documents

business practices

way business

business works

business modelwhy

good business model

term business model

new business models

new models of business