Internet Business

Strategies
and
Business Models

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Outline
 The Internet Value Proposition
 Four Strategies
 New Competitive Threats
 New Competitive Opportunities
 Business Models

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The Internet Value Proposition

 Internet commerce must start with a strategy, and the

analysis of the strategy starts with value. What are the
sources of Internet value?
 It is believed that the ability of the Internet to change the
landscape of commerce comes from 2 key ideas:
• The Internet can be used to transform customer relationships,
and
• The Internet can displace or alter traditional sources of
business value.
 These 2 ideas lead to 4 basic strategies for businesses to
consider both in exploiting the Internet and in defending
themselves against competitors.

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The Internet Value Proposition (cont.)

 Transforming Customer Relationships:

• By exploiting the Internet, traditional commerce
evolves from being supplier-centered to being
customer-centered.
• This leads to two business strategies:
• A customer-centered business organized
around a product (called Channel Master
strategy), or
• A customer-centered business organized
around meeting the needs of a group of
customers (called Customer Magnet
strategy).

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The Internet Value Proposition (cont.)

 Displacing/altering traditional sources of

business value.
• The Internet moves commerce from the
physical world to the information world.
• A focus on the supply chain leads to the
Value Chain Pirate strategy.
• A focus on distribution – reaching the
customer – leads to the Digital Distributor
strategy.

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Four Internet Business
Strategies
 Channel Master
 Customer Magnet
 Value Chain Pirate
 Digital Distributor

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Channel Master
 The channel master strategy works by using the Internet
to build deeper customer relationships in order to sell
traditional goods or services.
 This strategy is organized around products, concentrating
on the best possible delivery of those products and their
related services.
 A company using the channel master strategy must re-
engineer all its customer-facing activities.
 In other words, the company must integrate the
commerce value chain with their existing operations

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Example of Channel Master:
Cisco Systems
 Cisco Systems is an $18 billion provider of Internet
software, hardware and services. It uses its Web site as
the primary sales channel to its customers and partners.
 Attract (get and keep customer interest):
• Full online catalog
• Demonstration of ordering process
• Customers are notified of price changes
 Interact (turn interest into orders):
• The online catalog enables searching, browsing, and
configuration of purchases.
• Intelligent agents suggest alternatives (such as software
upgrades) and identify errors.

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Example of Channel Master:
Cisco Systems (cont.)
 Act (coordinate order fulfillment):
• Orders link to procurement and order management
databases.
• Customers can monitor or receive notifications about order
status.
 React (provide after-sales service):
• Customers can access comprehensive documentation and
self-help intelligent agents.
• A Bug Alert mechanism automatically notifies customers of
bugs.
 Results:
• 70% of all product support is delivered through the Internet.
• Large fraction of orders arrive through the Internet channel.

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Customer Magnet
 The customer magnet strategy works by using the
Internet to attract a group of customers by meeting their
needs with a knowledge sharing environment and
aggregated supplier access.
 This strategy is organized around a group of customers,
delivering a broad range of products and services to
these customers.
 A company using the customer magnet strategy seeks to
be the destination of choice for a whole category of
customers.
 A customer magnet must integrate the value chains of
multiple suppliers into one customer-facing whole.

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Example of Customer Magnet:
Yahoo
 Yahoo tries to be the first place for people to visit when
they go online.
 In addition to providing information, Yahoo offers free
services such as e-mail, instant messenger, and Web
sites (via GeoCities).
 Attract (get and keep customer interest):
• Yahoo offers tremendous amount of free information and
links to other sites.
• Members can participate in discussion groups, real time
conferences on many topics, and can set up new ones via
Yahoo Clubs.
 Interact (turn interest into orders):
• Yahoo operates Yahoo Shopping, which offers retail
shopping, warehouse shopping, auctions, and classified
ads.

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Example of Customer Magnet:
Yahoo (cont.)
 Act (coordinate order fulfillment):
• Yahoo shops offer the usual array of delivery
options.
• Yahoo also offers the ability to set up and operate
a new shop within Yahoo Shopping
 React (provide after-sales service):
• Although many Yahoo shops are operated by
other businesses, Yahoo has offered a uniform
level of after-sales service through a buyer
protection program that covers all Yahoo shops.

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Value Chain Pirate
 The value chain pirate strategy works by
capturing someone’s margins and displacing
them from their value chains.
 This strategy is organized around the value
chain, seeking to connect suppliers with
customers more directly.
 A business using the value chain pirate
strategy seeks the positions on the value chain
that offer the greatest leverage.

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Example of Value Chain Pirate:
Autoweb
 Autoweb displaces part of the value chain of
car dealerships by selling cars directly to
consumers (with the actual delivery handled by
a traditional dealer).
 Attract (get and keep customer interest):
• Autoweb offers no-haggle service backed by extensive
online information about cars and options.
 Interact (turn interest into orders):
• Autoweb has complete information about cars,
options, and colors available.
• Customers can accurately request a quote for the
vehicle of their choice.

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Example of Value Chain Pirate:
Autoweb (cont.)
 Act (coordinate order fulfillment):
• Autoweb uses traditional dealerships for
delivery and service.
• It has partnerships with other companies to
provide insurance and financing.
 React (provide after-sales service):
• Autoweb provides extensive information on
warranty issues, insurance, recalls, repairs,
and maintenance.

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Digital Distributor
 The digital distributor strategy works by
focusing on pieces of value that can be
delivered better through the Internet.
 A company using this strategy is
organized around disaggregating
traditional bundles of products and re-
aggregating products and services that
can be delivered efficiently through the
Internet.

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Example of Digital Distributor:
Monster.com
 Monster.com began by offering online employment
advertising for high-technology jobs.
 As the Internet has become a cross section of global
society, Monster.com has added job listings spanning all
industries and has built a global network of national
services.
 It has also aggregated other services related to career
management, such as resume listings, moving, real
estate, education and finance.
 Attract (get and keep customer interest):
• Offers free services to individuals
• Attracts employers who pay for their listings

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Example of Digital Distributor:
Monster.com (cont.)
 Interact (turn interest into transactions):
• Monstere.com offers automatic Job Search Agents, which
sends e-mail to customers to alert them about new job
postings that match the profile of their desired jobs.
 Act (coordinate fulfillment):
• Offers a variety of tools such as resume screening for
employers
• Facilitates closing a new job (e.g., cover letter management)
 React (provide after-transaction service):
• Offers several services such as apartment finder and
moving services to assist individuals who have found new
jobs

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New Competitive Threats
 Each of the four Internet business strategies can be used
alone or in combination by competitors, and each forms a
different kind of threat to a business.
 Channel Master:
• Can competitors create superior channels to your
customers?
• Your customers could be attracted by better prices, better
services, etc. from your competitors
 Customer Magnet:
• Can competitors attract your customers and sell them your
products?
• Your could lose your customer base to someone offering a
broader range of services, and be forced to survive as a
commodity wholesale supplier to your competitor.

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New Competitive Threats (cont.)
 Value Chain Pirate:
• Can competitors hijack your position in the value
chain?
• Your supplier could leapfrog your position and sell
directly to your customers.
• Your distributor could obtain parts directly from your
suppliers.
 Digital Distributor:
• Can competitors disaggregate your value proposition?
• If your value proposition is based on an aggregation of
goods and services, it is possible for a competitor to
excel at some part of the overall offering.

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New Competitive Opportunities
 The four Internet business strategies also provide new
competitive opportunities.
 Channel Master:
• Can you improve your customers’ buying experience by
improving your cost, convenience, or ability to customize?
 Customer Magnet:
• Do your customers share broad needs that lend themselves
to new bundles of products and services?
 Value Chain Pirate:
• Can you jump over your direct suppliers or customers and
capture their margins?
 Digital Distributor:
• What parts of other companies’ propositions could you
improve by offering them on the Internet?

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Business Segments
 We use the word “segment” to describe collections of
businesses with similar requirements for Internet
commerce, whether or not they are in the same business
area.
 Three business segments are selected for consideration
of system requirements and design options:
• Consumer Retail: Businesses selling physical goods
directly to individual end consumers.
• Business-to-Business Cataloging: Businesses with online
catalogs selling products to other businesses. We focus on
MRO (Maintenance, Repair, and Operations) goods.
• Information Commerce: Businesses distributing digital
goods (e.g., information products and services) online with
fulfillment right over the network.

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Consumer Retail: Value
Proposition
 Ability to reach a global market
 Reduced marketing and selling expenses
 Increased efficiency of operation
 Ability to target consumers more precisely
 Ability to convey more accurate and timely
product and availability information

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B-to-B Cataloging: Value
Proposition
 Reduced cost of selling
 Reduced order processing costs
 Improved service levels for low-volume
customers
 Higher-quality information for customers
 Accurate information

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Information Commerce: Value
Proposition
 Collapse of the traditional distribution
chain
• On the Internet, information providers have
direct access to information consumers
without an intervening distribution channel.
 Ability to explore new business models
• Because the Internet is ultimately flexible,
information providers can easily experiment
new business models such as software
rentals, pay-per-view documents, etc.

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Information Commerce:
Business Models
 Advertiser Support:
• A content provider can generate revenue through
advertising.
• Advertisers pay for impressions: a set of eyes looking
at their advertisement.
• Advertisers pay for a site that has interesting and
compelling content attracting lots of visitors.
• Advertisers will pay more if the site can also collect
information from visitors such as age, sex, postal code
etc.

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Information Commerce:
Business Models (cont.)
 Subscription Services:
• Subscriptions are traditional models for print, but can
also work online.
• Consumers pay a fee for access to online information.
 Bundling Arrangements:
• In order to achieve a sufficient, critical mass of
information to attract visitors, content owners may sell
access rights to each other.
• Thus, a service provider who is not directly in the
content business may license access to content for
their users.

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Information Commerce:
Business Models (cont.)
 Document Sales:
• This is a broad category including the online sale of
research reports, articles, or software etc.
 Usage-Based Charging:
• Users pay according to their usage.
• Usage can include connect time, search queries,
number of pages viewed etc.
• Information products (e.g., online newspapers, etc.)
and information services (e.g., search engines, online
games, etc.) are eligible to usage-based charging.

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Information Commerce:
Business Models (cont.)
 Information Marketplace:
• Because the Internet greatly reduces transaction costs, it
could lead to a world in which the ultimate providers of
information sell directly to the ultimate consumers in a
vast information marketplace.
• Necessary components:
• Rights management for authors and publishers
• Containers (to protect information in transit and before
sale)
• Super-distribution to distribute information in secure
containers
• Clearinghouses to collect fees from end users and
distribute them to information providers

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References
 G. Winfield Treese and Lawrence C.
Stewart. Designing Systems for Internet
Commerce (2nd edition): Chapters 3 & 4.
Addison Wesley.
 Dr. Thomas Tran Slides

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