Transcript Business Models

Adopting appropriate
e-business models
CK Farn
April 2006 (Rev)
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
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 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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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
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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
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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
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What is a business model?
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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What is a business model?
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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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 & dist8ribute offering
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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
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Cost Structure
Revenue
High
High
Total Cost
Cost
Cost
Total Cost
Low
Low
Low
Volume
High
Low
Volume
High
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What is a business model?
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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?
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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
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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 & 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
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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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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
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Financial Viability
Risk considerations
What assumptions are being made about revenues
streams, costs, sales volumes? With what degree of
uncertainty?
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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?
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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
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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) & demandoriented transactions (organisation is in role of
seller)
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Examples of business models
Direct-to-Customer model
Place, and/or space
S
Communicate directly
* wholesaler (Ingram books)
* retailer
(Wal-Mart)
* producer
(Gillete, Nike)
B
* individual
* business
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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?
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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?
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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?
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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
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Examples of business models
Intermediary model
S
S
S
* individual
* business
Communicate indirectly
I
Intermediaries:
*broker / infomediary
*auction
*portal
*B2B marketplaces
B
B
B
* individual
* business
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Examples of business models
Intermediary model
Types of intermediaries
Broker or infomediary
Auctions
Portals
Marketplaces or hubs
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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
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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
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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
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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
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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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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
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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)
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