Business Models Components

Gilbert Peffer

JAD Workshop

October 22, 2002

Determinants of Business Performance

Business Model
Components and linkages
Dynamics

Performance

Internet

Environment
Competitive
Macro

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October 22, 2002 Brussels

Overview of Internet Properties

Properties of Internet
Impact of the Internet on the 5-Cs
Limitation to transactions over the Internet

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Properties of Internet
Mediating technology: Internet facilitates exchange relationships among
parties distributed in time and space
4 types of interconnection:
-

B2B: Business-to-business
B2C: Business-to-consumer
C2C: Consumer-to-consumer
C2B: Consumer-to-business

Universality: anybody anywhere in the world can potentially make his

products available to anyone else in the world.
Network externalities: the more people connected to Internet, the more
valuable it is.

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October 22, 2002 Brussels

Properties of Internet

Distribution channel: Internet allows to distribute music, news, video,

software, tickets, and so on.
Time moderator: Internet makes possible to obtain information 24 hours
a day.
Information Asymmetry Shrinker: Internet reduces the difference of
information available to parties.
Infinite virtual capacity: using the advances to storage and network
technologies, customers feel that Internet has infinite capacity to serve
them.

SimWeb

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Business Models Components

October 22, 2002 Brussels

Properties of Internet

Low cost standard: everybody uses the same protocol. As there is only
one standard, costs for users are lower.
Creative destroyer: the low entry costs, flexibility and unlimited
possibilities allow entrepreneurs to create new businesses.
Transaction-cost reducer: Internet reduces the costs of searching for
sellers and buyers, collecting information on products, negotiating
contracts and transportation.

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Business Models Components

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Impact of the Internet on the 5-Cs

Properties of Internet have a huge impact on the 5 main activities that rest
on information exchange: coordination, community, content
communication and commerce:
Impact on Coordination
Internet reduces the cost of transactions
Internet improves product-service features and quality

Impact on Community
Internet redefines communities, making them larger and much more
valuable
Distance and time are no drawbacks to join a community

SimWeb

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Business Models Components

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Impact of the Internet on the 5-Cs

Impact on Content
Information, entertainment and other products are delivered over the
Internet to more people

Impact on Communication
People can exchange electronic messages real-time, to many people and
with high content
Every user has the capacity to broadcast messages

SimWeb

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Business Models Components

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Impact of the Internet on the 5-Cs

Impact on Commerce
B2B: businesses buy and sell goods and services to and from each other.
- Internet provides access to sellers and buyers from all over the world
- Internet can create B2B hubs, to provide a central where sellers and buyers
can go to find each other

B2C: businesses sell to consumers.

-

Access to e-shops 24 hours a day

Almost no limit to the number of goods an online retailer can display
Firms can collect data and offer personalised service
Some goods can be received instantaneously
When the cost of finding a seller is high, the exchange can involve an
intermediary (e.g. Amazon.com)

C2C: consumers sell to other consumers.

- Usually, this involves an intermediary, such as an action house.

C2B: consumers state their price, and firms either take it or leave it.
- Usually, intermediaries play an important role
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Business Models Components

October 22, 2002 Brussels

Limitations to Transactions over the Internet

Internet cannot transmit tacit knowledge (that is, knowledge uncoded and
nonverbalised).
Individuals and organisations are cognitively limited. So, they may not be
able to encode their knowledge into a form that can be transmitted over
the Internet.

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October 22, 2002 Brussels

Overview of Business Models

Definition
A taxonomy of Business Models
Elements of a Business Model

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Definition
An Internet business model is a set of Internet and non-Internet-related
activities planned or evolving that allows a firm to make money using the
Internet and to keep the money coming.
An business model should include answers to a number of questions:

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What value offer to customers?

Which costumers to provide the value to?
How to price the value?
Who to charge for it?
What strategies to undertake in providing the value?
How to provide the value?
How to sustain any advantage from providing the value?

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A Taxonomy of Business Models

Brokerage: firms act as market makers who bring buyers and sellers
together and charge a fee for the transaction they enable.
Examples: travel agents, online brokerage firms, online auction houses.

Advertising: the owner of a website provides some content and services

that attract visitors, and makes money by charging advertisers fees.
Examples: Yahoo, Altavista.

Infomediary model: a firm collects information on consumers and their

buying habits and sells it to firms.

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A Taxonomy of Business Models

Merchant: wholesalers and retailers sell goods and services over the
Internet.
Manufacturer: manufacturers try to reach end users directly through the
Internet.
Affiliate: a merchant has affiliates whose websites have click-through to the
merchant, which pays a fee to the affiliates each time a visitor to an affiliates
site clicks through to the merchants site and buys something.

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A Taxonomy of Business Models

Community: users have invested in developing relationships with members

of their community and are likely to visit the website frequently.
Example: iVillage

Subscription: members pay a subscription price and receive high-quality

content.
Utility: users pay for the services they consume.

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Elements of a Business Model

Customer value
Customers would buy a product from a firm only if the product offers them
something competitors product do not. This something can take the form of
differentiated or low cost product.
Differentiation: a firm can differentiate its products in eight different ways:
-

Product features
Being the first to introduce it
Ease of access to the products
Service
Product mix
Association with another firm
Brand-name reputation

Low cost: products or services cost customers less than those of its
competitors

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Elements of a Business Model

Scope
Scope deals with:
Market segments or geographic areas to which the value should be offered
How many types of products that embody versions of this value should be sold

Revenue sources
Determination of the sources of a firms revenues and profits.
It allows to make better strategic decisions

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October 22, 2002 Brussels

Elements of a Business Model

Price
To profit from the value that firms offer customers, they have to price it
properly
Types of pricing:
Menu pricing: sellers sets a price and buyers can take or leave it.
One-to-one bargaining: seller negotiates with a buyer to determine at what
point the buyer considers the price appropriate for the value he is getting.
Auction: seller solicits bids from many buyers and sells to the buyer with the
best bid.
Reverse auction: sellers decide whether to fulfil the orders of potential buyers.
Barter: swap of goofs for goods, or goods for services.

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Elements of a Business Model

Connected activities
A firm must perform the activities that underpin the value (value chain).
The activities should be consistent with the value the firm is offering, reinforce
each other, take advantage of industry success drivers and make the industry
more attractive to the firm.
The activities a firm performs are a function of where the technology is in that
industrys life cycle, the technological evolution of the customers and what
competitors are doing.

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October 22, 2002 Brussels

Elements of a Business Model

Implementation
The way of carrying out the decisions depends on several factors:
Structure of a firm.
Systems that allow information flow in the shortest time to the right target for
decision making.
Motivation of employees, and capability of making the right decisions with the
available information.
Recognizing the potential of an innovation.
Organisational culture.

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October 22, 2002 Brussels

Elements of a Business Model

Capabilities
Firms need resources to perform the activities
Firms need the capacity to turn the resources into customer value and profits:
competence.
The competitive advantage allows the firm to offer its customers better value
than competitors.

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October 22, 2002 Brussels

Elements of a Business Model

Sustainability
To sustain a competitive advantage a firm can pursue some subset of three
generic strategies:
Block strategy: a firm tries to erect barriers around its business model to
prevent others from imitating it.
Run strategy: a firm must keep innovating its business model.
Team-up strategy: a firm can pool others resources to strengthen its business
model.

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October 22, 2002 Brussels