Chapter 2 Adopting appropriate ebusiness models Paula Goulding

Chapter 2 Adopting appropriate e-business models Paula Goulding ICT 326 IS Management

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 ICT 326 IS Management 2

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 ICT 326 IS Management 3

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 1990 s serious search for frameworks/models to analyse & define e-commerce landscape ICT 326 IS Management 4

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, ICT 326 IS Management and thus routinely misappropriated 5

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 ICT 326 IS Management 6

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 ICT 326 IS Management 7

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 ICT 326 IS Management 8

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 ICT 326 IS Management 9

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 ICT 326 IS Management 10

What is a business model? ICT 326 IS Management 11

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? ICT 326 IS Management 12

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 ICT 326 IS Management 13

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? ICT 326 IS Management 14

Product & service portfolio ICT 326 IS Management 15

Product Portfolios ICT 326 IS Management 16

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? ICT 326 IS Management 17

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? ICT 326 IS Management 18

Suppliers & Business Networks ICT 326 IS Management 19

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? ICT 326 IS Management 20

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 ICT 326 IS Management 21

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? ICT 326 IS Management 22

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 ICT 326 IS Management 23

Financial Viability § Risk considerations – What assumptions are being made about revenues streams, costs, sales volumes? With what degree of uncertainty? ICT 326 IS Management 24

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? ICT 326 IS Management 25

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 ICT 326 IS Management 26

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) ICT 326 IS Management 27

Examples of business models Direct-to-Customer model Place, and/or space S Communicate directly * wholesaler (Ingram books) * retailer (Wal-Mart) * producer (Gillete, Nike) ICT 326 IS Management B * individual * business 28

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? ICT 326 IS Management 29

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? ICT 326 IS Management 30

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? ICT 326 IS Management 31

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 ICT 326 IS Management 32

Examples of business models Intermediary model S S S * individual * business Communicate indirectly I Intermediaries: *broker / infomediary *auction *portal *B 2 B marketplaces ICT 326 IS Management B B B * individual * business 33

Examples of business models § Intermediary model – Types of intermediaries § Broker or infomediary § Auctions § Portals § Marketplaces or hubs ICT 326 IS Management 34

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 ICT 326 IS Management 35

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 ICT 326 IS Management 36

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 ICT 326 IS Management 37

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 ICT 326 IS Management 38

Implications for managers § Simple framework of business models helpful for enhancing understanding and dialogue among managers – Serves to align organisational members to organisational mission ICT 326 IS Management 39

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 ICT 326 IS Management 40

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) ICT 326 IS Management 41

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. Mc. Graw-Hill Irwin, Boston. Taylor, D. and Terhune, A. D. (2001) Doing e-Business. Wiley, New York. ICT 326 IS Management 42