Transcript e-Commerce, Chapter 3, Enhanced Lecture Slides

e-Commerce
Rayport, Jaworski
Chapter 3 Enhanced Lecture Slides
Business Models
Exhibits and Tables
Copyright © 2002 by Marketspace LLC
Business Models — Today’s Objective
To develop an understanding of business models for the networked
economy
Chapter 2
Where will the
business
compete?
Chapter 3
How will the
business win?
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–1: Components of a Business Model
Developing a business model in the networked economy requires four key choices on the part
of the senior management:
Value Cluster
Marketspace Offering
Resource System
Financial Model
• Specify the value proposition or
the value cluster for the business
• Articulate the online product,
service and information offer
• Define how the company needs to
align its resources to deliver the
value proposition
• Define and select the most
appropriate revenue model to
pursue
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–2: Shattering the Myth That Consumers Care Only About
Prices Online
Percentage of Customers Who Care About Attribute
Customer Support
65
Attribute
On-time Delivery
58
Product Shipping & Handling
49
Product Content
49
Privacy Policies
45
Ease of Ordering
24
Product Information
24
Web Site Navigation & Locks
23
Product Selection
22
Product Price
19
0
10
Source: JP Morgan Report: etailing and the five Cs
20
30
40
50
60
70
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–3: Value Proposition/Cluster
The first step in the articulation of the business model is clearly specifying the value
proposition or the value cluster for the business:
Defining the value proposition or the value
cluster requires managers to answer the
following questions:
Value Cluster
• Which target segments should the
company focus on?
• What is the combination of customer
benefits that is offered?
Marketspace Offering
• What makes the firm and its partners
better positioned to deliver the offering
than anybody else?
Resource System
Financial Model
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–4: Value Proposition/Cluster
The definition of the value proposition is the result of a combination of choices about the
customers, the benefits offered and the unique capabilities of the firm:
Target
Segments
PC Flowers
& Gift
FTD.com
+
Key Benefits
Offered
+
Unique
Capabilities
Value
Proposition
“The special occasion
segment”
• Fresh flowers
• Complementary gifts
• Low prices
• Online experience
• Unique, broad product
line of complementary
gifts
“PC Flowers & Gift serves
the special occasion
segment by providing fresh
flowers and unique
complementary gifts”
“Mid- to high-end
market”
• Easy delivery of
flowers
• Strong brand name
• Market
Communication
• Supplier network
“FTD.com provides the
mid- to high-end market
with the easiest way to
send flowers thanks to its
extended network of
suppliers”
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–A: CarPoint Example
CarPoint’s value cluster offers benefits that address multiple segments of customers:
Target
Segments

CarPoint

“The
intimidated by
the process”
“The
information
seekers”
Key Benefits
Offered
+



Unique
Capabilities
+
Information
about cars and
their prices
Help on how to
deal with dealers
(tactics used,
etc.)

Extensive
information
- In different
formats (3D
views, pictures,
videos)
- From different
sources (i.e.,
Kelley Blue Book)



Knowledge of
the Internet
Software
development
expertise
Microsoft brand
name
Network of
partners
Value
Cluster

“The efficiency of
the Internet
makes selecting
and purchasing
your car easier”

“Provides a onestop source with all
the necessary
information to
make a car
purchase”
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–B:
Point-Counterpoint: Single vs. Cluster of Benefits
Should the company focus on delivering a single benefit exceptionally well, or should it
attempt to deliver all the benefits that online customers are seeking?
Point-Counterpoint
Single Benefit
Cluster of Benefits
 Clear, non-contradictory communication to
customer
 Partnerships can be assembled with “likeminded” firms
 Back-office systems must be tailored to distinct
benefits
 Focuses employee hiring and retention
 Focuses the enterprise
 Customers rarely desire one benefit
 In the online world, back-office systems can
easily be reconfigured for different benefits
 With an online presence, a firm can provide
multiple benefits — with no tradeoff of
performance (e.g., provide broadest selection
and low price)
o Examples of firms that offer multiple benefits
include portals (i.e., Yahoo), ISPs (i.e., AOL),
product sites (i.e., BN.com) and information
services (i.e., WSJ Interactive)
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–5: Marketspace Offering
The next step is to articulate the online product, service and information offering:
Value Cluster
Defining the Marketspace offering requires
managers to complete the following
sequential tasks:
Marketspace Offering
• Identify the scope of the offering
• Identify the customer decision process
Resource System
• Map the offering to the consumer
decision process
Financial Model
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–6: Scope of the Offering
The scope of the offering refers to the number of categories of products and services offered
on the site:
Continuum of Scope
Category-Specific Dominance
Focus on one product category
Cross-Category Dominance
Focus on a large number of categories
• Secondspin.com (used CDs)
• Dealtime (electronics and other goods)
• PremiumOrchids.com (orchids)
• 1-800-Flowers (flowers)
• Peapod (online grocery)
• Streamline* (online grocery, dry
cleaning service, etc.)
* Streamline closed down in 2000
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–7: Metamarkets
The term ‘metamarkets’ refers to sites that group products and services that are closely
related in the mind of customers:
BabyCenter.com offers a good example
of a “goal-derived” metamarket. The site’s
products and information focus on one
goal: raising a healthy child.
• Shopping for baby and maternity products
• Support community for parents
• User personalization
• Reference information
• Support and help from experts
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–8: Customer Decision Process
The second step in the construction of the online offering is the articulation of the customer
decision process for the various product categories:
Flowers Example
Prepurchase
Purchase
Problem Recognition

Need recognition, potentially triggered by a
holiday, anniversary or everyday events
Information Search

Search for ideas and offerings, including:
– Available online and offline stores
– Gift ideas and recommendations
– Advice on selection style and match
Evaluation of Alternatives

Evaluation of alternatives along a number of
dimensions, such as price, appeal, availability, etc.
Purchase Decision

Purchase decision
Message selection (medium and content)

Postpurchase
Satisfaction

Post-sales support
– Order tracking
– Customer service
Loyalty

Education on flowers and decoration
Post-sale perks

Disposal
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–9: Mapping the Offering to the Decision Process
The last step in the construction of the online offering is mapping the products and services
onto the customer decision process:

What occasions trigger the need
for my product? What tactics can
be used to stimulate demand?
Need
Recognition

Search for
Ideas and
Offerings

What post-sale
services can the
website offer to
create loyalty?
Customer
Decision
Process
Post-Sale
Support and
Perks
Evaluation of
Alternatives
Purchas
e
Decision

What functionality should the
site present to communicate
privacy, trust and security?
What information would
the consumer need to
make a selection?

What are the key evaluation criteria
that the consumer will use to evaluate
my product/service? What information
should the website offer to make the
consumer comfortable with his or her
choice?
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–10: Egg Diagram for 1-800-Flowers.com





“Care and handling”
“Do it yourself”
Special events and
educational
workshops held at
stores
Product
Offering




Post-Sale Support
Order receipt e-mail
eQ&A online customer
service
FAQ
Customer service
inquiry form
Perks






Gift reminder service
Holiday specials
Ideas and Information
Everyday celebrations
 Floral ideas
 Garden ideas
suggestions
 Home ideas
Special occasion suggestions
 Gift ideas
 Gourmet ideas
Need
 Store locator
Recognition
 Recommendations by budget
 Bestsellers
Education on Flowers
and Decoration
Post-Sale Support
and Perks
Miles earned with
flower purchases
Free gifts
Discounts at AOL
& BN.com with
flower purchases
Member specials
Search for Ideas
and Offerings
Flower / Gift
Decision Process
Evaluation of
Alternatives
Gift Recommendations
 Gift guru
 Favorite gifts
 Gift frequency
 Gift impossible
 Gift baskets
 Corporate gift services





Message
Selection


Gizmo fully-animated
greeting cards
Physical cards in gifts
Product price
Product picture
Product description
Delivery information
Delivery availability
Purchase
Decision



Shopping basket
E-commerce transaction
Special shopping features
– Delivery outside US
– 1-800-lasfloras.com
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
B2B Example: FreeMarkets
Customer Decision Process
The customer decision process is applicable to the B2B space as well and is used to understand
how companies choose their partners/suppliers for a particular product/service:
Need Recognition
Prepurchase

The company recognizes the saving associated with
online B2B auctions

The company starts looking for information on online
auction providers

The company evaluates potential online auction
providers, based on factors such as fees for conducting
the auctions, knowledge of markets, reputation

FreeMarkets works directly with buyers, analyzing
spending and applying its market-making experience
to help buying organizations identify potential savings.

Working with client buyers and engineers, FreeMarkets
creates a comprehensive RFQ, which defines all
elements of total cost.

FreeMarkets identifies potential suppliers, whose
capabilities best match the buyers’ needs.

Selected suppliers prepare their quotes with the
support of FreeMarkets and submit real-time bids.
Buyers watch the online bidding from their facility.

FreeMarkets collects cost breakdowns from suppliers
to validate quotes and also supports final supplier
analysis and qualifications to achieve optimal award
decisions.
Last Updated: 09/12/01
Information Search
Evaluation of Alternatives
Identify Savings Opportunities
Prepare Total-Cost RFQ
Purchase
Identify, Screen and Support
Suppliers
Conduct Online Bidding Events
Postpurchase
Provide Post-Bid Analysis
and Award Support
Copyright  2002 by Marketspace LLC
B2B Example: FreeMarkets
Egg Diagram



Product
Offering
Post-sale support
Contract award
implementation
 Final supplier analysis
 Project management
services






Immediate savings
Fast ROI
Improved purchasing
decisions





Informatio
n Search
Fees for conducting
the auctions
Global reach
Depth of information
Reputation and experience
Technology platform
Evaluation of
Alternatives
Need
recognition
Provide
Post-Bid
Analysis
Industry case studies
Supply markets case studies
Buyer and supplier testimonial
Buyer and supplier benefits
Market information
The Online
Auction Process
Identification of products
and services
 Commodity expertise
Identify Saving
 Industry analysis
Opportunities for
 Opportunity identification and
Buyers
assessment
Prepare TotalCost RFQ
Conduct Online
Bidding Events
Real-time online auction
 Auction supervision
 Nine vertical market groups
 True market prices
 Development and enforcement
of market rules





Identify, Screen
and Support
Suppliers
For suppliers
Free registration and participation
New business opportunities
RFQs
Bidding strategy formulation
Bidder training and support
in over 30 languages



Online request for quotation
 Collecting the RFQ information
 RFQ creation and distribution
For buyers
Supplier research,
identification and recruiting
In depth, global knowledge of
supply markets
185 product and service
categories
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–11: Resource System
The third step is to define the resource system and how the company must align it to deliver
the benefits in the value proposition:
Value Cluster
Marketspace Offering
A series of activities is required to construct
a resource system:
1. Identify core benefits in the value
cluster.
Resource System
2. Identify capabilities that relate to each
benefit.
3. Link resources to each capability.
Financial Model
4. Identify to what degree the firm can
deliver each capability.
5. Identify partners who can complete
capabilities.
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–12: Step No. 1 — Identify Core Benefits
The core benefits must be identified in the construction of the value cluster:
1-800-Flowers.com serves the “mid- to high-end market” with a broad gift assortment, fresh flowers,
reasonable prices and easy access because of its strong brand name, product and media partnerships
and bricks-and-mortar network of franchises.
Broad
Assortment
of Gifts
High
Quality of
Flowers
Customer
Service
Widesprea
d, Easy
Access
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–13: Step No. 2 — Link Capabilities to Benefits
Managers need to identify which capabilities are required to deliver each benefit, regardless
(at this point) of the ability of the company to access or develop that capability:
For 1-800-Flowers.com, the benefit “widespread, easy access” is linked to four capabilities: strong brand
name, wide reach to customers, multiple points of contacts and a popular website.
Broad
Assortment
of Gifts
High
Quality of
Flowers
Popular Website
Multiple Contact
Points
Customer
Service
Widespread
, Easy
Access
Wide Reach to
Customers
= Core benefits
= Capabilities
Strong Brand
Name
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–14: Step No. 3 — Link Resources to Capability
After the capabilities are identified, the firm should determined the resources necessary to
deliver each capability:
Broad
Assortment
of Gifts
High Quality
of Flowers
Popular
Website
Telephone
3,000 Affiliates
Multiple
Contact
Points
Online
Franchis
e Stores
Catalog
Customer
Service
= Core benefits
Widespread,
Easy
Access
Wide Reach
to Customers
Strong Brand
Name
= Activities & assets
= Capabilities
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–15: Steps No. 4 and 5 — Ability to Deliver Capabilities
The next steps assess whether the company has all the necessary capabilities in-house or if it
has to look outside and select the most appropriate partners to complete the missing
capabilities.
1-800-Flowers.com would not be able to deliver the capability “wide reach to customers” alone, and
therefore would need to create partnerships. Companies like MSN, AOL and Snap are potential partners.
Broad
Assortment
of Gifts
High
Quality of
Flowers
Popular
Website
Multiple
Contact
Points
Starmedia
Customer
Service
Widespread
, Easy
Access
MSN
Wide Reach
to Customers
AOL
Snap
= Core benefits
= Activities & assets
= Capabilities
= Partners
Strong Brand
Name
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–16: 1-800-flowers.com Resource System
BloomNet
Network
Address Book
Gift
Recommendations
Online Gift
Center
Gift Reminder
Third-Party
Contractors
Strong
Distribution
Network
Fulfillment
Center
Stores
Rich Content
Broad
Assortment
of Gifts
High Quality
of Flowers
Personalization
Capabilities
Popular Website
Garden Works
Integrated
Partner Offers
Telephone
3,000 Affiliates
Plow & Hearth
Online
Great Foods
Widespread
, Easy
Access
Customer
Service
Multiple Contact
Points
Franch
ise
Stores
Catalog
Technology
Custome
r Service
Centers
= Core Benefits
= Activities & assets
= Capabilities
Integrated
online
offline
Systems
Strong Brand
Name
Wide Reach to
Customers
Snap
Starmedia
MSN
AOL
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–C: 1-800-Flowers.com Resource System
Online and Offline Integration
BloomNet
Network
Address Book
Gift
Recommendations
Gift Reminder
Strong
Distribution
Network
Fulfillment
Center
Third-Party
Contractors
Stores
Rich Content
Online Gift
Center
Broad
Assortment
of Gifts
High Quality
of Flowers
Personalization
Capabilities
Popular Website
Garden Works
Integrated
Partner Offers
Telephone
3,000 Affiliates
Plow & Hearth
Online
Great Foods
Widespread
, Easy
Access
Customer
Service
Multiple Contact
Points
Franch
ise
Stores
Catalog
Technology
Custome
r Service
Centers
= Online Activities & Assets
= Offline Activities & Assets
Integrated
Online and
Offline
Strong Brand
Name
Wide Reach to
Customers
Starmedi
a
Snap
MSN
AOL
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–17: 1-800-Flowers.com Egg Diagram
Online and Offline Integration



Special events and
educational workshops
held at stores




“Care and handling”
“Do it yourself”

Gift reminder service
Holiday specials
Everyday celebrations suggestions
Special occasion suggestions
Ideas and Information
Need
Recognition
Online
Product Offering
Prompts on
toll-free number
recording
 Suggestions from
CSRs* in-store and
via phone
 Brochure


Offline Product
Offering
Prompts on toll-free number recording
Suggestions from CSRs* in-store and via phone
Education on Flowers and
Decoration








Floral ideas
Garden ideas
Home ideas
Gift ideas
Gourmet ideas
Store locator
Recommendations by budget
Bestsellers
Gift Recommendations
 Gift guru
 Favorite gifts
 Gift frequency
 Gift impossible
 Gift baskets
 Corporate gift services
Search for Ideas
and Offerings
Post-Sale Support


In-store
customer service
Customer
service on tollfree number




Order receipt e-mail
eQ&A online customer
service
FAQ
Customer service inquiry
form
Evaluation of
Alternatives

Perks

In-store specials
Specials offered
via phone





Suggestions
from CSRs in
stores via
phone
Brochure
Flower / Gift Decision Process
Post-Sale Support
and Perks





Miles earned with
flower purchases
Free gifts
Discounts at AOL &
BN.com with flower
purchases
Member specials

Message
Selection




*CSR = Customer service representative
Gizmo fully-animated greeting
cards
Physical cards in gifts
Select card in-store
Select card via phone
Product price
Product picture
Product description
Delivery information
Delivery availability


Information
from CSRs
in-store and
via phone
Brochure
Purchase
Decision





Shopping basket
E-commerce transaction
Special shopping features
– Delivery outside US
– 1-800-lasfloras.com
Purchase in-store
Purchase via phone
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–18: Assess Resource System Quality
A number of criteria can be used to assess the quality of a company’s resource system:
Uniqueness of the system
Is the system providing unique benefits, capabilities and resources?
Links between parts of
the system
Do capabilities support
the benefits?
Do capabilities and
activities complement
each other?
Are the resources
mutually reinforcing?
Links between
virtual and
physical world
Does the online
resource system
support the
offline?
Sustainable advantage
Is the resource system difficult to
replicate?
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–D: 1-800-flowers.com Partnerships

American Airlines Advantage, Delta Airlines SkyMiles, United Airlines Mileage Plus
– Earn frequent-flyer miles with 1-800-flowers.com purchases

MCI WorldCom
– Receive 1-800-flowers.com gift certificates with long distance sign-up
– Receive 10 percent off every 1-800-flowers.com purchase with MCI WorldCom membership

America Online
– First agreement signed in 1994
– Exclusive marketer of fresh-cut flowers across key AOL brands until 2003
– One-year exclusive agreement to market gardening products commenced November 1999

Microsoft Networks
– Premier floral partner and anchor in the MSN home and garden department
– Products, advertising and links featured on MSN shopping channel

Snap.com
– One of the 45 premier merchants in Snap shopping service (online e-superstore)
– Anchor tenant in Snap.com flower shop
– To be spotlighted in select Snap.com on-air promotions, scheduled to run on the NBC Television
Network during the Valentine’s Day and Mother’s Day periods
Source: 1-800-flowers.com website, WR Hambrecht & Co., TheStandard.com. Hoover’s Online
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–D: 1-800-flowers.com Partnerships
(Cont.)

Excite@Home
– Markets flowers and other gifts through Excite.com and webcrawler.com web sites
– Products, advertisments and links featured in the Excite Shopping Channel
– Entered second year of marketing relationship in October 1999

Yahoo Inc.
– Will run banner advertisements throughout the Yahoo Network, with additional presence in shopping area

StarMedia Network
– Developing Spanish and Portuguese language versions of 1-800-flowers.com website

People PC
– Signed one-year agreement to become key floral and gift-provider for PeoplePC as of October 1999

Zapa.com
– Offers selection of online greeting cards on 1-800-flowers.com website
– Greeting cards never deleted by Zapa.com
– Users will be able to personalize greetings with their own photos, clip art or other multimedia creations

Sears, Roebuck and Co.
– Licensing relationship which enables Sears customers to use their store charge cards when shopping with
1-800-flowers.com
Source: 1-800-flowers.com website, WR Hambrecht & Co., TheStandard.com. Hoover’s Online
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–E: 1-800-flowers.com Activity System
Introduction of
New Product
Categories
Key
Online
Offline
Both
Electronic
Greeting Cards
Gift
Recommendations
Gift Reminder
Program
Broad Product Line
Online Gift Center
Address Book
Nationwide
Presence
Florist
Participation
Company
Offline
Stores
Partnership
With
Associated
Product
Lines
BloomNet Network
Company
Franchise Stores
MSN
Multiple
Customer Contacts
Online
Strategic Alliances
In-Store
BN
AOL
Telephone
Affiliate Programs
Alliance
With
Distributio
n Carrier
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–F: 1-800-flowers.com Value System
Gift
Recommendations
Gift Reminder
Address Book
Online Gift
Center
Logistics
Broad
Assortment
of Gifts
Garde
n
Works
Fresh
Flowers
Product
Partnerships
Sourcing
Telephone
Brand Name
Plow &
Hearth
Online
Great
Foods
Widespread
, Easy
Access
Reasonable
Prices
Multiple Contact
Points
Stores
Affiliates
Logistics
= Core Benefits
BloomNet
Network
Media
Partnerships
Snap
Starmedia
= Actions
= Capabilities
MSN
AOL
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–G: 1-800-flowers.com Value System
Gift
Recommendations
Gift Reminder
Address Book
Online Gift
Center
Logistics
Broad
Assortment
of Gifts
Garden Works
Fresh
Flowers
Product
Partnerships
Sourcing
Telephone
Brand Name
Plow & Hearth
Online
Great Foods
Widespread,
Easy
Access
Reasonable
Prices
Multiple Contact
Points
Stores
Affiliates
Logistics
= Core Benefits
Media
Partnerships
BloomNet
Network
Snap
Starmedia
= Activities & assets
= Capabilities
MSN
AOL
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–H:
Point-Counterpoint: Competencies vs. Resource Systems
Point-Counterpoint
Focus on Competencies
Focus on Resource Systems
 Organizations can lose focus by not
isolating the few key capabilities that
differentially lead to competitive
advantage
 Exceptional competencies provide
competitor advantage since most
activities are the “price of entry” into
a particular online market
 Isolation of a handful of key
competencies leads to ignoring other
key success factors
 It is the combination of capabilities -not capabilities in isolation -- that
provides competitive advantage
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–19: Type of Financial Models
A variety of financial models can be used to assess the value of the business model that
follows from the resource system. Three examples are:
Revenues
Models
• Identify the flow
of cash into the
organization
Shareholder
Value Models
• Assess how the
company intends
to generate cash
flow or
shareholder value
Growth
Models
• Assess how the
company will be
able to drive
revenue growth
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–20: Revenue Models
While firms can pursue a number of revenue models, some are used most frequently:
Advertising
• Advertising revenues can be generated through the selling of ads, site sponsorships, event
underwriting, etc. (e.g., Yahoo, AOL, Business2.com)
Product, Service, Information
• Revenues can be generated from the sales of goods and services (e.g., Amazon, CDNow,
Buy.com)
Transaction
• Revenues can be accrued from charging a fee or taking a portion of the transaction sum for
facilitating a customer-seller transaction (e.g., Schwab, eBay)
Subscription
• Website can gain revenues by offering subscription services for information (e.g., FT.com,
NYTimes.com)
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–21: Shareholder Value Models
Shareholder value models help identify how a company plans to generate cash flow or
shareholder value. They can be grouped in two broad categories, based on the source of
value creation:
Company- and User-Derived
Company-Derived
These models are used when
both the company and the users
provide content and value-added
services to the site.
These models are used when value
comes through products and
services generated by the company
with less value-added input from the
customers.
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–22: Company- and User-Derived
Alternative
Models
Metamarket
Switchboard
Auctions
(Traditional & Reverse)
Category Switchboard
Description
Hub for many buyers and
seller; multiple categories
Competitive bid hub for
buyers and sellers
Aggregates brands in product
category
Examples
- BabyCenter.com
- Varticalnet.com
- eBay
- Amazon auction
- FreeMarkets
- Chemdex
- PlanetRX
- Buy.com
Revenue
Model
- Transactions
- Product sales
- Advertising
- Transactions
- Transactions
- Advertising
- Product sales
Value Source
- Perceived value-added
services
- Brand name credibility
- Percent of transaction
- Perceived value-added
services
- Brand name credibility
Key Success
Factors
- Build buyer database
- Build seller database
- Value-added services
- Build buyer database
- Build seller database
- Credible “hub” brand
- Efficient back-office support
- Build buyer database
- Critical mass of buyers and
sellers
Key Threat
Factors
- Alternative switchboard
emerges
- Niche switchboard
emerges
- Shift in care technology
- Alternative auction
- Niche auctions
- Price of switchboard offering
equal to auction
- Value-added services
differentiate competitors
- Emergence of metamarket
- Niche category switchboard
- Brand name strength of
market leaders
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–23: Company-Derived
Alternative
Models
Best information
Widest Assortment
Lowest Prices
Description
Timely, high values-added
information
Widest assortment within
category
Lowest prices within category
Examples
Forrester
Zagat
NYTimes
ArtistDirect.com
SecondSpin.com
Buy.com
Lowestfares.com
Revenue
Model
Product sales
Subscription
Product sales
Product sales
Value Source
Premium pricing based on
perception of best
information
Selective premium pricing
Unclear
Key Success
Factors
Timeliness of information
Perceived quality of
information
Reduce uncertainty in offering
Quality of information
Operational excellence
Supply-chain management
Key Threat
Factors
Gap between timeliness
and generic offerings not
perceived
Competitors matching
High cost of “freshness”
Specialization within category
Emergence of dominant
brands
Shopbots
Lack of profit imperative
Shifting investor confidence
Niche market
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–23: Company-Derived (Cont’d)
Alternative
Models
Broadest User
Network
Best Experience
Most Personalized
Description
Aggregation of users
around standards
Highest quality merchandise
Highest level of customization
Examples
ICQ
MP3
Mercata
FAOSchwartz.com
Ashford.com
Reflect.com
Revenue
Model
Varied
Product sales
Product sales
Value Source
Users drive traffic
Standard emerges
Price premium follows
Level of luxury premium
drives prices
Level of customization drives
prices
Key Success
Factors
Establish standard
Grow user network
Network economics
Ability to spot symbolic brands
Ability to judge quality
Deep customer knowledge
Ability to “mine” customer
database
Key Threat
Factors
Alternate standard emerges
Technology shift
Integration of
complementary players
Sub-niche markets emerge by
category
Symbolic brand loses appeal
Technology advances lead to
“me-too” products
Customers want control of
personalization
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–24: Revenue Growth Choices: 1-800-flowers.com
Financial growth models help understand how a company can drive revenue growth.
A classic framework is the Ansoff product/market matrix:
Gardenworks
Greatfoods.com
Home Decor
New
Plants

Plans to
branch into a
wide variety
of product
categories
Plow & Hearth
In-Store Seminars
Products
Gourmet Treats
Greeting Cards
Existing
Corporate Gift
Services
Existing
Online Markets
New
Existing
New
Offline Markets
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–I: Point-Counterpoint: Does Profit Matter? Build
Profit or Build User Base?
Point-Counterpoint
Build Profit
 Basic financial rules will eventually apply
 Cash flow drives shareholder value
 Shareholders will become frustrated as time
passes
Build User Base
 Standards will ultimately dictate success
 Standards require huge investments in building
a customer base
 Once customer base dominates, other firms will
concede and eventually large margins will be
available
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–25: What Is a Good Framework?
A good taxonomy or framework should be simple and meaningful. While there a number of
different business classification schemes, we will concentrate on three of them:
1. Porter Strategy Model
2. Sawhney and Kaplan Model
3. Rayport, Jaworski and Siegal Model
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–26: Porter Strategy Model
Key concepts:
•
There are only three basic strategies
•
Each implies a different business model
•
Firms can pursue only one strategy at the time
Possible Strategies
Differentiation
Cost
Niche
Business
Model
• Requires constant
innovation and
leadership on the
benefits that matter
most to the customer
• Focus on gaining
competitive advantage
on costs while
maintaining parity
level on differentiation
• Focus the business
on a particular
segment of the market
and then pursue either
differentiation or cost
strategy
Networked
Economy
Example
• Travelocity.com
• Lowestfare.com
• Lastminute.com
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–27: Sawhney and Kaplan Model
Key concepts:
•
Introduces the concept of eHubs – B2B and B2C
•
B2B eHubs are the new middleman that can create value by aggregating buyers and
sellers, and lowering transaction costs
•
B2B hubs are classified as either vertical hubs (serve vertical markets) or functional
hubs (provide common business functions)
•
Vertical hubs eventually will form alliances with functional hubs or “metahubs” can
emerge
Vertical Hubs
Paper
Chemicals
Plastics
Steel
Logistics Management
Media Buying
Functional Hubs
Advertising
Energy Management
Source: Adopted from Business 2.0, September 1999, page 88
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Exhibit 3–28: Rayport, Jaworski and Siegal Model
Key concepts:
•
Introduces a 2x2 table to categorize businesses based on the “Source of Content
Origination” and the “Focus of Strategy”
•
The matrix categorizes four pure-play approaches, and a number of hybrid
approaches
Source of Content Origination
Demand-Side Supply-Side
Focus of Strategy
Single Brand
Multiple Brand
Forward-Integrated
Producer
(Walmart.com)
Supply-Side
Aggregator
(Surplusdirect.com)
Backward-Integrated
User
(Dellonline.com)
Demand-Side
Aggregator
(Accompany.com)
Hybrid Integrator
(Cisco.com)
Hybrid Aggregator
(Amazon.com)
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Table 3–1: Implications of “Pure Play” Business Approaches
Business Model
Forward-Integrated
Producer
Implications
Potential Sources of
Competitive
Advantage
Potential Benefits to
Producer
Potential Benefits to
User
• Streamlined
•
•
outbound logistics
Producer brand
Producer customer
base
• Lower cost for
delivery of products,
services or
information
• Efficiencies that
translate into cost
savings
• Lower price for
products, services
or information
• Efficiencies that
translate into cost
savings
Backward-Integrated
User
• Streamlined
inbound logistics
Supply Aggregator
• Strong brand
identity
• Relevant strategic
alliances
• Lower cost for
• More targeted
delivery of products,
access to
services or
customers
information
• Efficiencies that
translate into cost
savings
• Lower price for
• Time savings
products, services
• Privacy
or information
• Efficiencies that
translate into cost
savings
Demand Aggregator
• Strong brand
identity
• Relevant customer
scale
• Expanded access
to customers
• More targeted
access to
customers
• Connection to
others who are likeminded
• Access to relevant
information/advice
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Case Study: Schwab
Value Cluster
Schwab’s value cluster offers a combination of benefits that address multiple segments of
customers:
Target
Segments


Schwab

Existing
offline
customers
Professionals,
incomes
< 150K, trade
frequently
Key Benefits
Offered
+
Supporting
Rationale
+

Innovative
products

Superior, cutting
edge technology

Superior service

Innovation

Lower prices
Value
Cluster

“Use technology
to lower costs
and offer
superior service
at lower price to
investors
unwilling to pay
for investment
advice”
Professionals,
incomes
< 150K, buy
and hold
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Case Study: Schwab
The Marketspace Offering Egg Diagram


Product
Offering








Schwab Learning Center
Live events
Principles of investing
Understanding market cycles
“Did You Know” Q&A
Get educated
about
investing
Online chat with customer service
representatives
Customer service via phone
Post Customer service via e-mail
Investment
Customer service at branch
Support
My Watch List
Overall
 General Goal
Planner
 Investor Profile
 Sample
Investment Plans
Retirement
Estate
 Retirement
 Estate Tax and
Planner
Probate Calculator
 IRA Analyzer
 Alternatives Comparison
College
Plan
 College Planner
investments
Tax
 Tax Strategies
 IRS Withholding
Calculator
Online Investment Process







Margin loans
Money transfers
Automatic investing
Options service
After-hours trading
Account protection
Bill payment
Perform
Investment
Decide on
Investment




Schwab signature
services
Schwab AdvisorSource
Options service
Global investing service
Overall
 Quotes and Charts
Perform
 Analyst Center
Research
Stocks and Options
 Stock Analyzer
Bonds and Treasuries
 Schwab BondSource
services
Annuities
CDs and Money Markets
 Schwab Select
 SchwabOne
Annuity
Life Insurance
 Insurance-needs
calculator
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Case Study: Schwab
Resource System
Schwab’s resource system is centered around Schwab’s three main benefits: low price,
innovative products and superior services.
Learnin
g
Center
Invest
in CSR
Trainin
g
OneSource
Center of
Knowledge and
Innovation
Investment in
R&D
Customer Service
Innovative
Products
Cutting-Edge
Technology
Optimize
Staff in
Branches
Charge for
ValueAdded
Services
Provide
Lower
Commission
for Frequent
Traders
= Core Benefits
Align CSR
ComZpensation
with Quality
of Service
Investment in IT
Hire IT
Staff
Train IT
Staff
System Reliability
24/7
Access
Partnerships with
Content Providers
Multiple Points of
Access
Hoover
s
Streamlined
Operations
Lower
Prices
Online
Phone
S&P
Media
General
Competitive
Commission Rates
= Capabilities
Superior
Service
= Resources
Branch
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Case Study: Schwab
Resource System: In-House vs. Outsourcing
Schwab does not have the all the capabilities necessary to deliver the core benefits. Some of
them will be acquired trough partnerships:
Learnin
g
Center
OneSource
Center of
Knowledge and
Innovation
Investment in
R&D
Cutting-Edge
Technology
Optimize
Staff in
Branches
Charge
for Value
Added
Services
Provide
Lower
Commission
for Frequent
Traders
= Company can
perform inhouse
Invest
in CSR
Trainin
g
Hire IT
Staff
Align CSR
Compensation
with Quality
of Service
Well-Trained
CSRs
Capable IT Staff
Innovativ
e
Products
Train
IT Staff
Superior
Service
24/7
Access
Investment
in IT
System Reliability
Partnerships with
Content
Providers
Multiple Points of
Access
Hoover
s
Streamlined
Operations
Lower
Prices
Competitive
Commission
Rates
= Company needs
to outsource or
partner
Online
Phone
S&P
Media
Genera
l
Branch
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Case Study: Schwab
Activity System
Large
investment in R&D
Exceptional
team of engineers
Innovative
products
System
able to
handle
large
volume
In-house
technology
developmen
t
Technology
leadership
Increase in
non-trade
revenue
Superior
service
High-quality
investment
information
Hoover
s Online
Multiple
points of
access
Comprehensive
information
Online
Phone
Downsized
branch staff
Low price
Investment in IT
24/7
Customer service
Large,
well-trained
sales force
Increase in
trade
volume
Branch
Partnership
s with
content
providers
Media
General
S&P
Comstock
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Case Study: Schwab
Partners Give/Get Matrix
A “give/get” matrix shows the benefits to Schwab and to its partners derived from working
together:
Partners
Benefits to Partner: “Give”
Content Partners  Partners receive revenues from Schwab
(e.g., Hoovers,
 Exposure and branding on a major site
S&P, Media
 Click-throughs
General, H&Q)
Benefits to Schwab: “Get”
 Best-in-class content essential for Schwab to
differentiate itself from other discount brokers
OneSource
Partners: Mutual
Fund Managers
 Access to large flow of business from Schwab
customers
 Significant reduction in marketing costs
 Cement the relationship with the customer by
acting as valuable “switchboard”
 Schwab receives transaction fees from funds
Website
Partners:
Razorfish
 Opportunity to work with high-profile client
 Ongoing fee-based relationship
 Access to highly creative site designers
 Consistent customer experience and look &
feel
 Frees up internal resource
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Case Study: Schwab
Financial Models
Revenue Model
•
Revenues are generated from trading (commission and principal transaction fees) and
non-trading activities (mutual fund service fees, net interest revenues, etc.)
Value Model
•
Schwab is the provider of the best information for investors (Stock Analyzer, Analyst
Center, etc.)
Growth Model
•
Development of advance online software tools and after-hours online trading
Growth Model
Advanced Software Tools
New
After-Hours Trading
International Expansion
Products
International Expansion
Learning Center
In-Branch Seminars
New Online Investment Bank
Existing
Existing
New
Online Markets
Existing
New
Offline Markets
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–J: Point-Counterpoint: Who Would You Rather
Be: A Dot-Com or a Bricks-and-Mortar Business?
Point-Counterpoint
Pure Dot-Com Start
Bricks-and-Mortar Start
 Not constrained by old-economy culture
 Not constrained by physical world assets that
have no value in the digital world
 Old-economy business culture does apply
 Have assets – brand, channels, people – that
have tremendous value in digital world
 Can operate fast
 New rules apply
 Can operate “right”
 Old financial rules supercede new rules
 Great examples: Amazon, Yahoo
 Great examples: GE.com, Dellonline.com
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Supporting Slide 3–K: Business Model Choices Must be Consistent
With Sources of Competitive Advantage
Business Model Options (Not Mutually Exclusive)
ForwardIntegrated
Producer
Content
Production
E-Business
Interface
Content Utilization
BackwardIntegrated
User
Content
Production
E-Business
Interface
Content Utilization
Supply
Aggregator
Content Production
Content Production
Content Production
Content Production
Content Production
Content Production
E-Business
Interface
Content Utilization
E-Business
Interface
Content Utilization
Content Utilization
Content Utilization
Content Utilization
Content Utilization
Content Utilization
Demand
Aggregator
Content
Production
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Chapter 3:
Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy

Case study: Schwab

Conclusion
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC
Business Models — Conclusion
After today’s lesson, you should be able to answer the following questions:
1.
What is a business model?
2.
What is the difference between value proposition and value cluster?
3.
What different approaches can a business use to develop an online
offering?
4.
What is a successful, unique resource system and what are its
components? What are the steps necessary to develop a resource system?
5.
What are the different financial models available to firms? What are the
main differences between revenue, shareholder value and growth models?
6.
What are some frameworks that can be applied to the networked economy?
Last Updated: 09/12/01
Copyright  2002 by Marketspace LLC