Transcript Update on Internet Business Models:

Update on Internet Business
Models:
Emerging lessons and open questions about the
transformation of business through information
technology
Taylor Randall
University of Utah
[email protected]
Lecture Outline
• Emerging lessons on new business models.
• Choosing a model for electronic retailing.
Value chains have always consisted of product flows
and information flows.
Consumer
Retailers
Distributor
Product flows
Information flows
Potential for information technology to transform information flows
to create new business or streamline old business.
Common Business Propositions
#1 - Business built on information content
Information flows alone have significant value.
Examples: iVillage, web communities.
#2 - Direct sales and distribution
Eliminate intermediaries
Examples: Web Van, eToys, Amazon
#3 - Streamlined transactions
Automated purchasing functions exchanges
Examples: E-bay, Exostar, Ventro Group
Proposition #1: Easier Delivery of Information Content
i-Village: Information Content for Women
Proposition #2: More Efficient Sales - Eliminate Retail Locations
e Toys: Toy Retailing
Proposition #3: Streamlined Purchasing: Business Exchanges
Ventro Group - B2B purchasing
4 lessons emerging
from the dot.com crash...
Lesson 1:
History shows that innovative business success
depends on a solid technological infrastructure
.… this takes time.
They who fail to learn from history are doomed to repeat it.
History Quiz: Who said it and when?
“You may go to an average store, spend valuable time
and select from a limited stock at retail prices…
or have our Big Store of World Wide Stocks come to you.”
a)
b)
c)
d)
Jeff Bezos - business plan of Amazon.com 1995.
Bill Gates - on retail plans for Microsoft 2000.
Vice President of Wal-mart e-tailing 1998.
none of the above.
History Quiz: Who said it and when?
Answer: d) none of the above
From Sears-Roebuck Catalog 1915
Catalog regarded by economists as a
“radical transformation in the marketing and
distribution of consumer goods.”
Sales Growth History of Sears Roebuck
Richard Sears
begins to sell
watches to
railroad station
agents.
1890
High Growth
1895
First large
general Sears
catalog.
1900
1905
1910
What happened here?
1915
1920
1925
Tough to deliver goods prior to 1900
The King Road Drag
Invention leveled and packed
muddy roads. Made auto
transportation possible.
Sales Growth History of Sears Roebuck
D. Ward King
invents the “King
Road Drag”
Richard Sears
begins to sell
watches to
railroad station
agents.
1890
High Growth
1895
First large
general Sears
catalog.
1900
1905
Sears installs
pick and ship
plant
(10x productivity
increase)
1910
1915
1920
1925
Congress mandates
“Parcel Post” as long
as you have good roads
So what was the greatest innovation the catalog?
or the King Road Drag?
Technological change happens in 3 phases:
1. Creation of infrastructure
2. Arrival of enabling technologies
3. Business built on the previous 2
“A lot of people jumped the gun.
They tried to skip the first two phases.”
Roger McNamee, Integral Capital Partners 2000
Can you identify the key technological infrastructure for your business?
Direct
Grocery Delivery
Stage of Development
Sears
Creation of Infrastructure
Roads
???
Arrival of enabling technologies
Pick System
Postal Service
???
Construction of business
Catalog Sales
home delivery
Lesson 2:
Because infrastructure changes slowly
old companies still hold power.
Even when American voters are most angry, they re-elect
88% of their politicians.
Vital Statistics of Congress.
Incumbent power comes from existing infrastructure.
Examples of incumbent power:
Politicians have political action committee dollars.
3 times as expensive to acquire a customer “on-line”
as it is to acquire a customer with physical stores.
Over 60% of all traditional retailers had data processing and
customer service capabilities before going on-line.
In 1925 Sears opened retail stores by 1930 retail store sales
had outpaced catalog sales.
Sales Growth History of Sears Roebuck
D. Ward King
invents the “King
Road Drag”
Richard Sears
begins to sell
watches to
railroad station
agents.
Sears opens
first retail
stores
1890
1895
First large
general Sears
catalog.
1900
1905
Sears installs
pick and ship
plant
(10x productivity
increase)
1910
1915
1920
Congress mandates
“Parcel Post” as long
as you have good roads
1925
1930
Lesson 3:
The parameter estimates in e-business plans
are so far off, even worst case sensitivity
analysis isn’t bad enough….
Incorrect estimates lead to adoption of
the unprofitable business models.
Example: Revenue Model for a Campus Intranet Provider
Advertising Model vs. Software Model
1 school
Advertising
# Schools
# Users Per School
1
Install
8000
Active Usage
65%
Sessions/Day
2
Page views/Session
Images/Page
12
4
Days year
180
CPM/1000 views
$25
Total Revenue
1 school
Software
$2.25 M
Maintenance
$250,000
$50,000
Example: Revenue Model for a Campus Intranet Provider
1 school
# Schools
# Users Per School
1
Phase I
750
8000
8000
Active Usage
65%
65%
Sessions/Day
2
2
12
12
4
4
Days year
180
180
CPM/1000 views
$25
$25
Page views/Session
Images/Page
Total Revenue
Business Valuation
$2.25 M
$2.5 B
$250 M
Example: Revenue Model for a Campus Intranet Provider
1 school
# Schools
Phase II
750
1200
8000
8000
8000
Active Usage
65%
65%
80%
Sessions/Day
2
2
2
12
12
12
4
4
4
Days year
180
180
180
CPM/1000 views
$25
$25
$45
# Users Per School
Page views/Session
Images/Page
Total Revenue
Business Valuation
1
Phase I
$2.25 M
$2.2 B
$6.3 B
$250 M
$500 M
Example: Revenue Model for a Campus Intranet Provider
1 school
# Schools
Phase II
Actual
750
1200
1200
8000
8000
8000
7000
Active Usage
65%
65%
80%
50%
Sessions/Day
2
2
2
.5
12
12
12
5
4
4
4
1.5
Days year
180
180
180
180
CPM/1000 views
$25
$25
$45
$3
# Users Per School
Page views/Session
Images/Page
Total Revenue
Business Valuation
1
Phase I
$2.25 M
$2.2 B
$6.3 B
$250 M
$500 M
$8.5 M
?
Under actual numbers software model makes more sense.
Lesson 4:
In many cases it is hard to sell the value
of improved information flow without the
accompanying product flow.
Example:
Business to Business Purchasing
Fragmented
Manufacturers
Distributors
Hospitals
Problem:
Fragmentation makes purchasing function too complex (multiple
shipments and invoices to track, pricing problems.
Opportunity:
Use New IT to consolidate invoicing and purchasing function
Example:
Business to Business Purchasing
B2B
Exchange
Question:
How much is the improved information flow worth?
Benchmark: Traditional Distributor gets 17% to 30% margin
New Propositions
Use technology to make old infrastructure more efficient.
#1 Enhance existing products and services with internet technology.
#2 Use technology to reduce costs of coordination within companies.
#3 Use technology to reduce transaction costs between business
partners.
Summary
Lessons from the dot.com crash
1 - Successful businesses built on new technology take time.
2 - Incumbents may be more successful using technology.
3 - Carefully consider the estimates in your business models.
4 - Carefully evaluate the value attached to information flows.
Choosing a business model for
internet retailing
Taylor Randall
University of Utah
Two basic choices
Inventory Ownership
Drop-shipping
Wholesaler
Wholesaler
Retailer
Customer
Retailer
Customer
What factors influence the choice of supply chain?
Supply Chain options on the Internet*
Primary way company fulfills online orders
% of Internet-only
retailers
From company facility that existed
13.9%
From company facility that was developed
30.6%
Drop-shipped
Drop-shipped
30.6%
30.6%
Outsourced
8.3%
From facility operated by a partner
8.3%
Electronic fulfillment (software)
5.6%
Other
2.7%
*The state of eRetailing 2000. Supplement to “eRetailing World” March 2000.
Motivating Example:
Meet Spun.com
“Cheap tricks”
•Start-up capital: $825,000
•200,000 CD titles
available for immediate
shipment
•No inventory
One supply chain type not dominant
within or across industries
Hold Inventory
Drop-ship
CDs
CDNow.com
Spun.com
General
Retailing
Amazon
Value America
Retail
Category
Business results not consistent
Hold Inventory
Drop-ship
CDs
CDNow.com
Spun.com
General
Retailing
Amazon
Value America
Retail
Category
Making Supply Chain Choice: Theory
Considerations in favor of drop-shipping:
•Reduced investment into fulfillment capabilities
•Wider product selection
•Lower fulfillment cost
•No inventory obsolescence
Considerations in favor of inventory ownership:
Hybrid
strategy?
•Benefits due to inventory pooling
•Higher product margin
•More control over stocking decisions
•More control over product offering
•Avoid encroachment of customers
•Ease of order consolidation
•Lower technology investment
Factors Influencing Inventory Choice
Own
Immature
Large
Low variants
Low uncertainty
Drop-Ship
Development of Industry
Mature
Firm Size
Small
Product Variety
Demand Uncertainty
High variants
High uncertainty
Lower
Product Transportation Costs
Higher
Lower
Product Obsolescence Risk
Higher
Sample Description
• Survey of 64 publicly held e-tailers
• 56 responses, 54 usable responses (84.4%)
• Between 60% and 70% of e-tailing revenue.
• Financial data from COMPUSTAT data base
• Example Companies
Amazon.com
Barnes&Noble.com
CDNow.com
Fogdog.com
Webvan.com
Pets.com
Egghead.com
Delias.com
Autobytel.com
Buy.com
• 36 companies choose to hold inventory (67%)
• 11 bankrupt companies (20%)
Measure of rational supply chain choice
Likely to drop-ship
Likely to own inventory
0
1
Elected to drop-ship
Elected to own
Model Recommendation
Own
Not own
Own
Rational
21 firms
Irrational
4 firms
Not own
Irrational
4 firms
Rational
17 firms
Actual Choice
Irrational supply chain choice
is associated with bankruptcy!
Irrational Supply Chain Choice and Probability of Bankruptcy
Rational
Choice
Probability of Bankruptcy
0.10
Irrational
Choice
0.37
Difference
0.27*
*statistically significant difference
Poor supply chain choice one of factors associated with failure.
Summary
Research results:
– theoretically obtained criteria for inventory choice,
– confirmed hypothesis empirically,
– linked inventory choice and firm performance.
Supply Chain Choice Parameters in
Grocery Industry
Market Trends:
2% of all sales will be over internet
$100 per order 20 or 30 times per year.
5% margin on food.
60 items per order
$25 delivery charge
Existing Store
Fixed Costs per Year
Picking Labor Per Order
Depot
$20,000
$10 million
$20
$5
When do you use a existing store and when do you use a depot?
Thanks to Taylor Randall…
• Take a pause.
• Student Group 38 on this recording
• Playback Student groups 28, 29, 30, from
previous recordings.
AMERICAN GREETINGS
Group 38 Phillip Kamutega
AMERICAN GREETINGS
GREETING CARDS AND SOCIAL
EXPRESSION PRODUCTS.
$7.5 BILLION INDUSTRY.
AG & HALLMARK, THE 800-POUND
GORILLAS IN THE INDUSTRY
AG.COM ESTABLISHED IN 1996
80-90% CARD BUYERS - WOMEN
STRENGTHS
EXPERIENCE (ESTD. 1906)
ECONOMIES OF SCALE(INTNL)
CAPITAL(ACQUISITIONS - GIBSON)
BRAND(LOCAL BRANDS)
LEVERAGE IN ALLIANCES
COMPLEMENTARY DIVISIONS
WEAKNESSES
COMPLEX PROCESSES
LOW VISIBILITY
LAGGARD (RESPONSE, FLEXIBILITY)
PRICE POLICY
THREATS
NIMBLE SMALL PLAYERS
DEEP DISCOUNTING
OPPORTUNITIES
CROSS MARKETING (BRANDS)
NEW TARGETS (MEN)
ALLIANCES & MERGERS(eg, AOL &
BlueMountain, Egreetings, BeatGreets, etc)
SCM & LOGISTICS (3Rs)
RECOMMENDATIONS:
1. REDUCE PROCESS COMPEXITY BY
CREATING SYMBIOTIC
RELATIONSHIPS (WITHIN &
WITHOUT)
2. EMPHASIZE THE 3Rs (MARKET
ORIENTATION)
3. PRICING POLICIES
4. RESTRUCTURE DEBT