Prudens Information Resources for the Internet


The E-Business Model

E-Business

A Prudens E-Report

e-Business Concept | Value Proposition | Sources of Revenue | Activities, Resources and Capabilities
Competencies & Competitive Advantage | E-Business Environment & Strategies | Summary



What is a Business Model?

The e-Business model, like any business model, describes how a company functions; how it provides a product or service, how it generates revenue, and how it will create and adapt to new markets and technologies. It has four traditional components as shown in the figure, The e-Business Model. These are the e-business concept, value proposition, sources of revenue, and the required activities, resources, and capabilities. In a successful business, all of its business model components work together in a cooperative and supportive fashion.

Figure: e-Business Model


Although an e-Business is often thought of as e-Commerce, there are other types of online activities that fall under the definition of e-Business that can benefit from this discussion (see e-Business Basics for basic concepts and definitions).

E-Business Concept

The e-business concept describes the rationale of the business, its goals and vision, and products or offerings from which it will earn revenue. A successful concept is based on a market analysis that identifies customers likely to purchase the product and how much they are willing to pay for it.

Goals and Objectives

The e-Business concept should be based, in part, on goals such as "become a major car seller, bank, or other commercial enterprise", and "to become a competitor to some of the well-known firms in each of these industries." Objectives are more specific and measurable, such as "capture 10% of the market", or "have $100 million in revenues in five years." Whether these goals and objectives are realistic or not, and whether the company is prepared to achieve these goals is addressed in the business plan process for startup firms and in the implementation plan for an existing firm that is considering a significant change. In looking at the business model it is sufficient to know what the goals and objectives are, and whether they are being pursued.

Corporate Strategies

Embedded in the e-Business concept are strategies that describe how the business concept will be implemented. These are known as corporate strategies because they establish how the business is intended to function. These strategies can be modified to improve the performance of the business. Environmental strategies, discussed in a following section, describe how the company will address external environmental factors, over which it has no control.

The E-Business Concept and Market Research

The selection and refinement of the business concept should be integrally tied into knowledge of the market it serves. In performing market research care must be taken to account for the global reach of the Internet for both customers and competitors. It is also important to remember that markets shift, and can shift rapidly under certain conditions. But most important is to truly understand what the market is, who comprises it, and what do they want.

Figure: The e-Business Concept


Products and Offerings


The Problem with WebVan

WebVan sold groceries online and delivered them to your door. It burned through $800 million before declaring bankruptcy. The company apparently didn't understand its goal or its market, and suffered from a faulty business concept.

Nearly every household in the country buys several hundred dollars worth of groceries each month. WebVan marketed to the upper income families yet didn't try to sell to all of the households that had difficulty getting to the grocery store. It could have had a much wider appeal through advertising, and could have initiated programs with organizations helping shut-ins (e.g. to help fill in the order forms), the disabled, and busy housewives with young children. These customers would have found Web Van's prices lower, the quality of its food higher, and the level of service higher than is found in other grocery stores. WebVan continued to market its service to young professionals and never seemed to realize that it didn't matter who bought the groceries they were selling and delivering!

Price

Pricing is an important part of the e-business concept and should be established on the basis of market research. Price is often set with an eye on the competition and can have a direct effect on market share. In traditional commerce in the U.S., the seller sets the price. Online pricing, on the other hand, may include negotiation or auction pricing, where the interaction of sellers and buyers can effect the price. Knowledge of competing prices is also readily available online, and will keep downward pressure on prices.

When is it OK to increase prices? It depends on the business. If a company has high fixed to variable costs, prices should be changed cautiously. If customers are "locked-in", and the product or service is less sensitive to price, then prices may be changed, to a degree, with less risk. But all changes should be checked beforehand with market research and financial analysis.

A potential problem for some products is that the market may change faster than the seller can change the product or service. One way to survive in this environment is to sell at the minimum price that allows a profit, avoid price changes and continuously upgrade the product. This approach is often used in computer hardware and software sales. At the same time the seller should invest in finding how to shorten the development cycle, and put in place a market research program that will quickly identify trends and changes.

The steady development of a product has other advantages. It evens out the revenue stream rather than having the "boom or bust" cycle of a single product. It also shows that the company is steadily developing and upgrading products for the customers who should begin to buy into the company's vision. And customers, analysts, and investors will develop confidence that the company is going to be around for the long-term.

The price must also provide real value to the customer, that is the customer must be pleased with the purchase of the product or service. In addition to price, the buyer may also be interested in how the product can be of assistance to his company. In this case, comparisons of price and ROI may be used to show that the offering adds more value than a competitor's. The price can also be a basis for building long-term customer relations, which can lead to multiple sales. For example, as retail customers become more comfortable shopping on a site, it should be easier to get them to migrate to higher margin products.

Value Proposition

The value proposition describes the value that the company will provide to its customers and, sometimes, to others as well. With a value proposition the company attempts to offer better value than competitors so that the buyer will benefit most with this product.

A value proposition may include one or more of the following points:

Providing value in an e-business uses the same approach as providing value in any business, although it may require different capabilities. But common to both are the customers who seek out value in a business transaction. The value proposition helps focus the business on the well-being of the customer, where it remains in successful companies.

Value Delivery through Integration of Activities

Integration of Organization or Enterprise Operations

The integration of systems inside and outside the organization can provide value for both customers and the organization. One of the requirements for e-business is to link front-end with back-end systems in order automate the online operations of the organization.

Front-end activities deal directly with the customer while back-end systems include all of the internal support activities that do not deal directly with the customer. Some enterprises have different geographic locations for front-end and back-end office activities and rely on the integration of the associated computer and network systems for successful corporate operations.

Figure: Front-End & Back-End Operations


Examples of activities that require integrated systems are:

External Integration: The Supply Chain

Operations on the Web can also extend to cooperating firms such as partners in a supply chain, also known as a "Value Web". The Value Web may include a wide range of participants as well as the possible use of a digital exchange to procure or sell products. Many firms have participated in a supply chain for years using Electronic Data Interchange (EDI) technology to buy and sell components and products.


Electronic Data Interchange (EDI)

Most large manufacturers, such as those in the automobile industry, have used EDI to engage in electronic purchasing and selling with supply chain partners and various buyers since the early 1970s. The number of firms using EDI has been in decline since 1997, when about 100,000 firms used EDI propriety software and a private network known as a value-added network (VAN) to buy and sell approximately $500 billion in goods. This networking system is too expensive for many small and medium-sized enterprises, although some are forced to use it in order to remain a supplier to a particular company.

Some firms using EDI are moving to the Internet to reduce the communications costs associated with VANs, but many are maintaining the status quo because the firms in their supply chain may not be ready to make the move. On the other hand, some smaller firms are utilizing the Internet and XML to achieve EDI on the Web. A large company like Sears, with thousands of suppliers, is able to continue working with large suppliers on a traditional EDI system, while moving smaller suppliers to a Web-based EDI system. The supplier systems are integrated with Sears's back-end systems in order to shave weeks off of the purchasing cycle.

Successful supply chains are vital for manufacturing operations since the timeliness, cost and success of the final product may depend on a component part made by a single supplier. The competence of suppliers may now be demonstrated through the ISO 9000 qualification process, which is critical when using suppliers from foreign countries or when the final products are exported.

Figure: Supply Chain Integration


When the supply chain transactions of the partners can be automated and integrated over the Web into the back-end systems of each other, then the resources of all the chain partners can be planned and managed for an efficient operation. An emerging approach to automate transactions with partners is to link systems through the corporate portal, which greatly reduces the integration requirements. Portal software now has potential connections, or hooks, where the systems of different enterprises can be linked to securely transfer data.

In addition to good technology, it takes a strategy, time, resources and, most importantly, trust between partners, for the supply chain to function successfully.

Structural Concepts to Deliver Value

The effective delivery of value to a customer, requires that a company organize its structure and functions according to the type of product or offering delivered. The value chain, as popularized by Michael Porter 1, describes a linear set of steps, which could be activities or business processes such as design, production and sales, whereby a manufacturing company delivers value. This value chain delivery model strives for overall efficiency and cost reduction by increasing the efficiency and reducing the cost of each business process. Each step is independent and separable, and can be outsourced, or contracted out to another company. The value chain becomes a supply chain when a company uses the inputs and activities of other companies in its manufacturing process.

However, the value chain doesn't appear to describe how many service-oriented businesses operate. Stabell and Fjeldstad, Timmers, and Afuah and Tucci, have developed additional concepts of "value shop" and "value network", following the work of Thompson to address other types of businesses.2

The value shop describes a service operation, such as a consulting, law or accounting firm, that focuses on customer needs rather than on the production process of the value chain. It may also describe a department, such as customer service, within a larger organization. For example a manufacturing company, a value chain operation, could have within it a department that operates as a value shop.

The e-business set up as a value shop works directly with the customer to provide a necessary, often unique, solution. The value shop is geared to solve specific client problems rather than to make a common solution more efficient. Some value shops, such as large consulting companies, will attempt to duplicate solutions among clients by introducing jargon to describe steps in an approach, and by attempting to fit the client's problem to the approach, rather than focusing on the client's problem.

The value network is a type of e-business where networked users negotiate a transaction on a web site. The value network hosts online auctions, brokering, market making, intermediation, or other types of transactions.

The value network depends on growth in order to attract more users. When the number of users on a value network increases, the network becomes more valuable to each participant since it increasingly becomes the site where desirable transactions will take place. Ultimately the strategy of network dominance results in large companies like eBay, since in theory it drives all of the users to be on one network. However, for various reasons described in a following section, this limit is never reached, and competitors do emerge, even for a company like eBay.

Sources of Revenue

Depending on the business model, several revenue sources may be available to an e-business. Many online businesses will have a three or four of these sources. A mix of revenue sources is often referred to as a revenue model but may be mistakenly called a business model. Some of these sources of revenue are:

For large public-private or government projects revenue sources might also include:

With small fast-growing companies such as e-Business startups, investors often track expected revenues and revenue growth and may make changes to increase revenue. However, after the Dot-Com boom ended, more traditional measures such as cash flow and earnings have came back into favor as means of evaluation.

Activities, Resources and Capabilities

The activities, resources and capabilities of a business are sometimes known as its requirements. In order to perform the activities required to carry out the mission of the business, certain resources are needed; for example, employees with certain skills, or capabilities, are needed to perform activities correctly and efficiently. Also, inventions, processes and other intellectual property may add to the individual knowledge of an employee to develop a competence in the performance of the required activities.

Activities

Activities are specific business processes or groups of processes such as design, production and sales that implement the business concept. The operational business model identifies the costs and outputs of each activity.

Activities drive the need for resources. Existing activities should be carefully scrutinized in order to conserve resources and reduce costs. Activities left over from previous initiatives, but not currently necessary should be curtailed. This may sound elementary but businesses start many activities over time, especially if its business concept changes. But one doesn't often hear of a large business curtailing its activities in order to focus on its current mission.

Also, proposed activities should be carefully reviewed before a commitment is made to develop them. Not only should they be aligned with the goals of the organization and contribute to offerings in demand in the market, but the required resources and capabilities should be considered. The implementation of some activities, such as production or manufacturing, have high costs that must be incurred before a product can be sold and revenues begin to flow.

E-Business Processes

Beware: Some fundamental e-business activities may infringe on patents. Business processes, or the "method of doing business" may be patented, so that a business model may unwittingly include the development or use of intellectual property owned by another party. Patents have been freely awarded for even the most straight forward business processes.3

One of the most widely renowned patent infringement cases was Amazon.com's patent for "one click" technology for purchasing items, which was at the center of its dispute with Barnes and Noble. One-click shopping allows the prospective buyer to bypass the use of a "shopping cart", which is cumbersome for many users.

Amazon.com also has a patent for its "Affiliates" program, which allows the company to market the products of other companies in return for a commission. This business process has been used freely by traditional businesses since the beginning of recorded history and the fact that this process has been patented is very controversial. Also controversial is Priceline.com's patent for a reverse auction method, which it uses to sell airline tickets.

In effect, a few companies have patented Internet business models, which are being used by many other companies. If these patents can be easily licensed at reasonable rates then there won't be a problem in the future development of e-business. But if not, the resulting chaos will inhibit the growth of the online business world.

Resources

In order to perform activities an organization requires human, tangible, intangible and supporting resources. Human resources, in particular the skills and knowledge of employees are important, as are the programs (e.g. incentives, training) and institutions that support them. Of related importance is the "corporate culture" that shapes how employees work together and which may also be instrumental in determining how a company works with its partners, or whether a merger between two companies can be successful.

Tangible, or physical and financial, resources include facilities, equipment, and cash reserves. Intangible resources include intellectual property, business processes that can be patented, brands, customer profiles and personalization data in databases, and customized software. Supporting systems include organizational structure, information systems or communications processes that may have little value as stand-alone resources.

Capacity

The total resources of the organization represent its capacity. When resources are underutilized, the company has resources that aren't used, or idle capacity. Idle capacity in manufacturing tends to be measured in terms of additional output that could be produced. In service organizations the measure for idle capacity is usually a number of employees. Resource capacity can also be measured in job-hours, machine-hours, sales per employee, or square feet. Often these are compared with industry standards to assess the efficiency of the organization.

Resources may also misallocated. Processes may be successively introduced over time that result in an overall inefficiency. This may be a significant potential problem in e-Business since activities are accumulated based on market demand and there are few if any other companies available for a comparison.

Capacity also represents a constraint to growth. Demand for product or services may exceed capacity and managers may take a variety of steps to temporarily resolve the problem: overtime for existing employees, additional shifts to increase the utilization of equipment, contracting to outside entities, even competitors! For example, a software company may outsource code writing, which is standard fare - almost a routine activity, in order to increase its design capacity. Of importance here is to be able to distinguish between real growth in demand versus periodic spikes in activity, which frequently occur in some industries such as printing. Real growth would merit the expansion of capacity. However, this should take place only after careful analyses of the current and future market, relevant technologies, and resource and financial requirements. And it should be executed based on an implementation plan.

Capabilities, Competencies and Competitive Advantage

In order for the business to be successful, workers with certain skills, or capabilities, must be available. This is important for two reasons. First wages are usually the highest expense of a business, as much as 70% of the budget of an organization with low capital requirements (e.g. an accounting, or legal firm). Second, capable workers may not always be available, which may lead to the issue of outsourcing, as discussed in a following section.

When activities, or sets of activities, are performed extremely well and are, in fact, among the best in the industry, then these are known as competencies. Competencies result from workers with distinctive capabilities; skills and processes that efficiently utilize resources, and combinations of activities that add significantly to the value of the output. Competencies become organizational strengths and an important component of the business model.

Sometimes competencies will allow a firm to lead an industry in providing value to customers. When other companies can't easily duplicate these competencies, the firm is said to have a competitive advantage. For example, a low cost manufacturing process may enable a company to sell products at a very low price and still make a profit - a situation that can't be matched by competitors.

Competencies may also point to possible future directions for the firm. When the business model fails due to factors beyond its control, such as a shift in the market, then a new business concept may be based on the competencies of the firm. Firms with leading edge programming staffs, for example, can often shift to another type of software application without too much difficulty. An e-tail operation such as Amazon can easily add new product groups to its Web site due to its industry-leading competencies in online transactions, customer tracking, order fulfillment/shipping, and customer service.

E-Business Environment and Strategies

The rate of change in e-business presents an enormous challenge to managers. Business on the Internet is just beginning, and is evolving through a process of trial and error. Management flexibility is a key for survival and success in e-business.

The environment of any organization consists of all of the factors that are beyond its control, but influence it in one way or another. Examples of these factors are shown in the figure, E-Business Environment and Strategies. To counter the potential adverse affects of these factors, the e-business can respond with strategies. An external strategy is an approach to deal with factors in the external business environment such as competitors, markets, and technological developments, that are beyond the company's direct control. This is different from a corporate strategy, which addresses factors under the company's control such as the approach to marketing, sales, and pricing. Other components of the business model such as the value proposition and sources of revenue may also include strategies.

Figure: The E-Business Environment and Strategies


External strategies may be driven by components of the business model, such as finding workers with certain capabilities to staff activities. If the required work force is not available locally, the business concept may have to change, and workers brought in, or the work outsourced. Even though strategies may be implicit in the business model, such as hire workers at the industry wage, it is important to recognize them explicitly because they may have to change as the business environment changes.

The Competitive Environment and Strategies

The competitive environment, sometimes known as the industry environment, results from relationships with other firms. These relationships are with suppliers, customers, producers of substitute products, potential new entrants, competitors, "complementors", and strategic partners, which are described by Porter.4

When suppliers are limited, they may keep prices high and reduce the profit of a firm that buys from them. A strategy for the buyer is to find new suppliers, or producers of substitute products. On the other hand, if there are only a few buyers, they can keep prices low, but a strategy for the seller is to find more customers to compete for products in order to raise prices, or to find a more profitable of their industrial capacity. Therefore the Internet serves to increase the knowledge of prices, find producers of substitute inputs, and subsequently cause downward pressure on prices.

Potential new entrants to a market may also disrupt prices. Either they enter the market with low prices to gain market share, or they cause the existing firm to lower its prices in order to create a entry barrier to the new firm. Competitors may also cause prices to drop through price wars, but can also contribute to stability in the marketplace. Finally, complementors, firms that make products that need the firm's product to add value (e.g. software developers for particular PC operating systems), as well as strategic partners can create demand for the firm's products. In each case the Internet may be used to the advantage or disadvantage of the e-business. The point is that an e-business must have an Internet strategy to be successful.

First Mover Advantage

A strategy that has been used by some dot-com companies is the first mover advantage, that is, to be the first to serve a new online market. The common wisdom is that the first business into an unserved or underserved market captures the largest share of the market and is in a better position to survive and might even increase its market share in an economic downturn that causes competitors to go out of business.

Second Mover Advantage

In some traditional sectors, such as real estate development, being a first mover is often shunned as too risky, and the second mover advantage is sought. Second movers learn from the mistakes of first movers and may take advantage of the investments made by first movers by buying them at discounted prices. This strategy may be appropriate in the early years of an e-business where the risk is high and managers are responding quickly to a changing environment.

Increasing Value Through Network Dominance

Another strategy, mentioned earlier, involves one situation where being a first mover is very important. Metcalfe's Law states that the value of the network to each user increases as more users are added to the network. Therefore, one of the competing networks becomes dominant as most of the buyers and sellers shift to it. Competing with a company that has achieved network dominance is very difficult and expensive.

The best example of network dominance is the online auction, where eBay dominates the market. The auction site that starts first in a particular market and attracts the most attention and customers, is probably the most valuable to the occasional user who wants to buy or sell something. Only larger online companies with high traffic volumes, such as Amazon, Google, and Yahoo, can begin to compete on a "head-to-head" basis with eBay. However, smaller online auctions have opened in niche markets, where they may provide specialized knowledge and services.

Maintain and Improve Competencies

One obvious strategy is to develop the capabilities, and to build and maintain competencies in order to keep an advantage over other firms. To do this, one must understand market conditions and the firm's strengths and weaknesses.

Other strategies to maintain competencies include:

The Technology Environment and Strategies

Technology plays an important role in e-business and must be tracked closely. It can shift very quickly and greatly disrupt an unprepared company.

Disruptive Technologies

When a new technology creates a different approach to performing a task that is less costly, more efficient, or otherwise relatively advantageous and displaces existing technology, it is known as a disruptive technology. These technical disruptions can cause businesses to fail, particularly in those organizations unprepared to change their business model.

Examples of disruptive technologies are:

When high-speed optical networking was developed, many of the existing networking companies were slow to recognize its potential or miscalculated the time required to deploy the technology. As a result, new firms began meet the demand for glass fiber and switching components, and competed successfully with communications manufacturing companies that didn't change.

Technology Strategies

Every e-business concept based on a technology break-through runs the risk of being replaced by a company with a newer technology. Therefore, a strategy to maintain technological leadership, or to have access to the leading applicable technologies, is essential for the long-term survival of a technology-based e-business.

A technical innovation strategy can be as simple as outsourcing the technical side of an e-business rather than trying to maintain the competency in-house. If it is large enough, a firm can develop new technologies. But for most firms, an R&D program is too expensive. One option is to partner with an organization known for developing new technologies, so that they become available as they are developed. Co-developing and licensing technologies are also options. The use of a strategic alliance can serve as a technology strategy, as well as a competitive strategy.

To avoid falling victim to a new technology, a firm must try to keep abreast of technological developments that may affect its industry. Any company that is technology-dependent must have someone in-house who is knowledgeable about the latest technical developments. But more importantly, the company must be willing to take action when it appears that a major advance in technology poses a threat.

The General Environment and Strategies

The general environment contains those factors that face most businesses: laws and regulations, the economic climate, and worker availability.

Laws and Regulations

New laws and regulations may have unexpected effects on e-business, especially in the areas of privacy, patents and other intellectual property. E-Business leaders should understand regulations and the rational for local taxes, including how tax revenues are spent. Unfair tax breaks should not be expected by an e-business; neither should businesses expect to compete unfairly with other businesses.

Economic Climate

Sound financial strategies will help maintain cash flow and solvency during an economic downturn. Many small businesses simply run out of money before products begin to generate revenues. E-business should use the conservative accounting practices preferred by most investors.

Worker Availability

The availability of qualified employees is one of the biggest problems for an e-business attempting to grow from a startup into a small or medium sized enterprise. Although technical workers became available in the economic downturn after the Dot-Com crash, the availability of foreign workers decreased significantly after the terrorist attack of September 11, 2001. Larger technical companies, who had augmented their work force through hires of foreign workers prior to "9/11" now feel that must outsource large numbers of jobs abroad in order to find the talent needed to stay competitive. Whether outsourcing will be proven as a successful strategy over time remains to be seen. Certainly it will work in some situations, but it is unlikely to work in all situations.

Strategies for the local work force include obtaining and keeping qualified employees with programs such as training, child care, and employee services. Training programs are also necessary for all employees to develop skills in new technologies.

Summary

The Business Model:



Dr. James E. Burke is a Principal in Burke Technology Services (BTS). BTS provides business assistance to startup technology companies, or organizations planning or integrating new technologies; develops and manages technology projects; performs technology evaluation and commercialization, and assists in technology-based economic development.

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