CHAPTER 7

NEW BUSINESS MODELS AND STRATEGIES FOR

THE INTERNET ECONOMY

Screen graphics created by: Jana F. Kuzmicki, PhD, Mississippi University for Women
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If you are going to be in E-commerce, you have to build a business that destroys the old brick-and-mortar model.
John B. McCoy

There will be thousands of winners on the Internet. But there there will be only a very few really big winners. Quote
Mary G. Meeker

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Chapter Outline
Internet Technology and Market Structure Strategy-Shaping Characteristics of the E-

Commerce Environment
E-Commerce Business Models and Strategies Internet Strategies for

Traditional Businesses
Innovative Business Models

and Fast-Evolving Strategies are KSFs in E-Commerce

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Impact of the Internet and E-Commerce

Impact on external industry environment

Changes character of the market

and competitive environment Creates new driving forces and key success factors Breeds formation of new strategic groups Impact on internal company environment Having, or not having, e-commerce capabilities tilts the scales toward valuable resource strengths or threatening weaknesses Creatively reconfiguring the value chain will affect a firms competitiveness vis--vis rivals
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Characteristics of Internet Market Structure

Internet is composed of
Integrated network of users connected

computers Banks of servers and high-speed computers Digital switches and routers Telecommunications equipment and lines

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Supply Side of the Internet Economy

Major groups of Internet and e-commerce firms

comprising the supply side include Makers of specialized communications components and equipment Providers of communications services Suppliers of computer components and hardware Developers of specialized software E-commerce enterprises

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Business-to-business merchants Business-to-consumer merchants Media companies Content providers

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Strategy-Shaping Characteristics of the E-Commerce Environment

Internet makes it feasible for companies

everywhere to compete in global markets

Competition in an industry is greatly intensified

by new e-commerce strategic initiatives of existing rivals and by entry of new, enterprising e-commerce rivals
Entry barriers into e-commerce world are

relatively low
On-line buyers gain bargaining power
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Strategy-Shaping Characteristics of the E-Commerce Environment (continued)

Internet makes it feasible for firms to reach

beyond their borders to find the best suppliers and, further, to collaborate closely with them to achieve efficiency gains and cost-savings Internet and PC technologies are advancing rapidly, often in uncertain and unexpected directions Internet results in much faster diffusion of new technology and new ideas across the world E-commerce environment demands that firms move swiftly - at Internet speed
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Strategy-Shaping Characteristics of the E-Commerce Environment (continued)

Internet and e-commerce technology open up a

host of opportunities for reconfiguring industry and company value chains

Internet can be an economical means of

delivering customer service

Capital for funding potentially profitable e-

commerce businesses is readily available

Needed e-commerce resource in short supply is

human talent, in the form of both technological expertise and managerial know-how
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Effects of the Internet and E-Commerce

Can produce important shifts in an industrys

competitive forces
Alters industry value chains, spawning

substantial opportunities for increasing efficiency and reducing costs

Affects a companys resource

strengths and weaknesses

Rapid pace of technological change

with an often uncertain direction

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Overview of E-Commerce Business Models and Strategies

Provide new opportunities to put Offer potential to exploit

a globally-connected Internet infrastructure in place

Build out

business opportunities in a globally wired e-commerce environment

Business-to-business

telecommunications system
Install millions of servers Provide high-speed Internet

sales
E-procurement Business-to-consumer

connections to billions of businesses and households

Develop software and

sales
E-retailing Provide content

networks to create a wired global economy

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Provide services to users

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Business Models: Suppliers of Communications Equipment

Traditional business model of a manufacturer is

being used by most firms to make money Sell products to customers at prices above costs Produce a good return on investment Strategic issues facing equipment makers Several competing technologies for various components of the Internet infrastructure exist Competing technologies may Have different performance pluses and minuses Be incompatible
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Strategy Options for Suppliers of Communications Equipment

Invest aggressively in R&D to win the

technological race against rivals

Form strategic alliances to build consensus for

favored technological approaches

Acquire other companies with complementary

technological expertise
Hedge firms bets by

investing sufficient resources in mastering one or more of the competing technologies

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Business Models: Suppliers of Communications Services

Business models are based on profitably selling

services for a fee based on a flat rate per month or

volume of use
Firms must invest heavily in extending lines

and installing equipment to have capacity to

Provide desired point-to-point service and Handle traffic load

Investment requirements are particularly heavy

for backbone providers, creating sizable up-front expenditures and heavy fixed costs
Key to success - Establish networks ahead of

rivals to get in position to sign up customers

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Business Models: Suppliers of Communications Services (continued)

Fierce competition has emerged among last mile

providers selling high-speed Internet access Strategic options

Provide high-speed (broadband) Internet

connections using new digital signal line technology Provide wireless broadband services or cable Internet service Bundle local telephone service, long distance service, cable TV service and Internet access into a single package for a single monthly fee
Key strategic weapons for last mile providers -

Name recognition and advertising

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Business Models: Suppliers of Computer Components and Hardware

Traditional business model is used - Make

money by selling products at prices above costs Strategic approaches Stay on cutting edge of technology Invest in R&D Move quickly to imitate technological advances and product innovations of rivals Key to success - Stay with or ahead of rivals in introducing next-generation products Competitive advantage will most likely be based on strategies keyed to low-cost
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Business Models: Developers of Specialized E-Commerce Software

Business model involves
Investments in designing and developing

specialized software
Marketing and selling software to other firms

Profitability hinges on volume

Strategic approaches
Sell software at a set price per copy Collect a fee for every transaction provided by

the software
Rent or lease the software
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Business Models: E-Commerce Retailers

Sell products at or below cost and make money by

selling advertising to other merchandisers

Use traditional model of Purchasing goods from

manufacturers and distributors

Marketing items at a Web store

Filling orders from inventory at a warehouse

Operate Web site to market and sell

product/service and outsource manufacturing, distribution and delivery activities to specialists

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Strategic Approaches: E-Commerce Retailers

Spend heavily on advertising to build widespread

brand awareness, draw traffic, and start process of developing customer loyalty
Add new product offerings to help

attract traffic to firms Web site

Be a first-mover or at worst an early mover
Pay consideration attention to Web site

attractiveness to generate buzz about the site among surfers

Keep Web site innovative, fresh, and entertaining
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Business Models: Suppliers of E-Commerce Services

Key strategic issue for e-commerce retailers -

Handling warehousing and delivery activities Firms are using services of Internet middlemen to efficiently sort all the supplier choices Firms are using focus strategies to zero in on specific niches, pursuing competitive advantage based on First-mover mastery of a particular technology Product superiority Unique product attributes Convenience and ease of use Speed More value for the money
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Business Models: Media Companies and Content Providers

Using intellectual capital to develop music, games,

video, and text, media firms Charge subscription fees or Rely on a pay-per-use model Business model of content providers involves creating content to attract users, then selling advertising to firms wanting to deliver a message Key success factors for content providers Create a sense of community Deliver convenience and entertainment value as well as information
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Internet Strategies for Traditional Businesses

Use Internet technology to communicate and

collaborate closely with suppliers and distribution channel allies

Reengineer company and industry value chains

to revamp how certain activities are performed and to eliminate or bypass others
Make greater use of build-to-order

manufacturing and assembly

Build systems to pick and pack

products that are shipped individually

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Internet Strategies for Traditional Businesses (continued)

Use Internet to give both existing and potential

customers another choice of how to interact with the company

Adopt Internet as an integral distribution

channel for accessing new buyers and geographic markets

Gather real-time data on customer tastes and

buying habits, doing real-time market research, and use results to respond more precisely to customer needs and wants
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Key Success Factors: Competing in the E-Commerce Environment

Employ an innovative business model Develop capability to quickly adjust business model

and strategy to respond to changing conditions Focus on a limited number of competencies and perform a relatively specialized number of value chain activities Stay on the cutting edge of technology Use innovative marketing techniques that are efficient in reaching the targeted audience and effective in stimulating purchases Engineer an electronic value chain that enables differentiation or lower costs or better value for the money
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