chapter 3 types of e-business models and markets

Defining the Real E-Business Models An e-business model is simply the approach a company takes to become a profitable business on the Internet.. Furthermore, in a successful e-business,

Chapter 3: Types of E-Business Models and Markets

“Do not quench your inspiration and your imagination; do not become the slave of your model.”

—Vincent van Gogh (1853–1890)

Overview

In the past two years, e-business seems to have permeated every aspect of daily life In just a short time, both individuals and organizations have embraced Internet technologies to enhance productivity, maximize

convenience, and improve communications globally From banking to shopping to entertaining, the Internet has become integral to daily activities For example, just 23 years ago, most individuals went into a financial

institution and spoke with a human being to conduct regular banking transactions Ten years later, individuals began to embrace the ATM machine, which made banking activities more convenient Today, millions of

individuals rely on online banking services to complete a large percentage of their transactions

The rapid growth and acceptance of Internet technologies has led some to wonder why the e-business

phenomenon did not occur decades ago The short answer is: it was not possible In the past, the necessary infrastructure did not exist to support e-business Most businesses ran large mainframe computers with

proprietary data formats Even if it had been achievable to transfer data from these large machines into homes, the home computer was not yet a commodity, so there were few terminals outside of business to receive information As PCs became more popular, especially in the home, the ability to conduct e-business was still restricted because of the infrastructure required to support it, including backend customer and supplier interaction along with credit card processing systems

To set up an e-business even eight years ago would have required an individual organization to assume the burden of developing the entire technology infrastructure, as well as its own business and marketing strategies Today, the challenge of e-business is integration There are industry-leading companies that have solved the difficult task of developing individual Internet-based products and services that handle many of the issues surrounding customer and supplier interactions However, the ability to integrate these technologies and services based on sound business and marketing strategies, operating on a real-time basis, can be a monumental undertaking

As e-business continues to be fueled by both organizations and consumers who have access to the Internet from their homes and offices, the excitement grows and the potential for success increases But explosive growth of the Internet has also led to a growing number of integration challenges for e-businesses of all sizes and types

In phase one of building an e-business, companies scrambled to get an e-commerce Web site up quickly The operative word was “quickly,” because usually there was little or no regard given to how scalable or reliable the site needed to be—or even how captivating the content It was just a matter of beating the competition These first-to-market consumer sites were rarely integrated with the manufacturing side of the business, which was establishing its own Internet-based relationships with suppliers This lack of integration has proved to be a significant challenge for many organizations as the customer base has grown, real-time order status has been requested, and products have been returned

In phase two of building an e-business, having an e-commerce site is now a commodity, not a way to differentiate

a business Customer and supplier expectations are rising, forcing organizations to start thinking about backend integration and real-time transaction processing Businesses must actually maintain complete customer and supplier relationships using Internet-based technologies and tie those systems to the interpersonal aspects of the business transaction when required Organizations that realize the promise of e-business are the ones that have begun to address the complete business cycle and are leveraging Internet technologies

It is no secret that today’s e-business has the potential to transform the business landscape Whereas in the past, a company’s business model was the primary determination of its value, today, a company is valued on its strategy, business model, and ability to market With technology driving new competition, a Fortune 500 stalwart that once seemed unstoppable is now challenged by a start-up that uses Internet technologies and integrates their systems and processes more effectively By capitalizing on a sustained business proposition and correctly applying technology, these start-ups are able to significantly reduce the barriers to entry while dramatically increasing their market reach For e-businesses, the premise “first to market equals first to success” is often the case; however, the foundation needs to be laid carefully A disciplined approach to evaluating the business opportunity, and correctly assessing how a competitive advantage may be gained using Internet technologies combined with leveraging the existing investment, is key to a successful e-business It is just such an approach that is defined as the e-business model (see sidebar, “Defining the Real E-Business Models”)

Defining the Real E-Business Models

An e-business model is simply the approach a company takes to become a profitable business on the Internet There are many buzzwords that define aspects of electronic business, and there are subgroups as well, such as content providers, auction sites, and pure-play Internet retailers in the business-to-consumer space

Many Internet firms witnessed a meteoric rise in their stock values in the late 1990s, only to crash in 2000 For instance, Drkoop.com Inc in Austin, Texas, announced its initial public offering at $9 per share in June of 1999 The price rose to more than $30 per share, but then plummeted to less than $1 per share

Given the carnage among dot-com stocks recently, what type of online business models are expected to succeed

in the future? Businesses need to make more money than they spend The new model is the old model, but technology is essential to maintain a competitive advantage, and cash flow is more important than ever

For example, Yahoo Inc in Santa Clara, California, has always operated a successful portal site, providing content and an Internet search engine However, many portal sites, such as Go.com, MSN.com, and

AltaVista.com, have fallen on hard times

The idea behind portals is the same as that behind television advertising: aggregating eyeballs and directing them toward advertisements But, television viewers are passive, and people need to wait through the ads to see the shows they want to watch

However, the Web doesn’t work that way Content presentation is not serial Viewers are active, not passive There are always millions of places to go No Web advertisement can match a 20-second TV spot

When First-to-Market Fails

Many of the failing companies were operating on a first-to-market strategy Their hope was that by getting their ideas out ahead of the market, consumers would develop brand loyalty before competitors arrived

For example, Priceline.com Inc in Norwalk, Connecticut, is a good example of a company that attempted this strategy, with its name-your-own-price scheme for buying airline tickets and other goods However, the closing of Priceline.com Inc.’s Greenwich, Connecticut-based WebHouse Group licensee (which applied the same model to groceries and gasoline), combined with increased competition from airlines and other travel sites, led Wall Street

to trade Priceline.com’s stock down to less than $3 per share in December 2000, from a high of $104.25 in March 2000

First-to-market as a business model has always been risky You are vulnerable because you have nothing proprietary, need vast funding, and rely on rapid deployment

So why did investors and venture capitalists get caught in such speculative and irrational investments? Investors felt they were investing in technology, when they were really investing in retailers and distributors These companies have small profit margins They couldn’t justify their valuations in typical price/earnings ratios When does it turn profitable? Companies such as Amazon.com have yet to answer that

One segment of the business-to-consumer world that’s thriving is niche markets For example, RedEnvelope Gifts Inc., which launched in 1997 as 911gifts.com, began as a last-minute gift site, but now markets more than 5,000 items that are unique to the site Customers seem willing to pay a premium for RedEnvelope-edited selection and enhanced customer service The company has $70 million in sales, with a 57-point profit margin There needs to be a quick path to profitability And, the ultimate metric is margin There are three levers to achieving margin: edited selection, customer service, and inspirational branding

The B2B Way

Is the model buyer- or seller-centric? What is the driving force of the business?

The greatest strength of the Internet is its ability to bring together people, governments, and businesses and facilitate the flow of information among them This is one of the main reasons why business models for business-to-business online marketplaces are expected to succeed

It’s clear that the Internet is a viable platform for B2B trade According to Forrester Research Inc in Cambridge, Massachusetts, a projected $4.9 trillion in business-to-business (B2B) transactions will be made online by 2004

But private marketplaces being formed by industry leaders represent a more successful model These real-time supply chains and e-business design systems are phasing out the more expensive and inflexible electronic data interchange networks

The real surprise here is how hard it is to become profitable The cost of branding technology is so high that consumers still use a catalog A Web site is just another channel

E-Business Models

The emerging e-business market affords companies of all sizes and types the opportunity to leverage their existing assets, employees, technology infrastructure, and information to gain or maintain marketshare For example, in the telecommunications industry, service, rather than technology, is now the key differentiator With lower barriers to entry, new competitors are rapidly entering the market offering new services, such as online bill presentment and payment, and leveraging their unique digital assets

Information technology research analysts agree that e-business is any net-enabled business activity that transforms internal and external relationships to create value and exploit market opportunities driven by new rules of the connected economy (see sidebar, “Defining the Real E-Business Models”) However, today’s e-business requires more Industry analysts further point out that e-e-business involves the continuous optimization

of an organization’s value proposition and value-chain position through the adoption of digital technology

The challenge for an organization is to turn the vision and the market opportunity into a viable business

Developing the marketing strategy and plans and designing and deploying the business solution is key Those who successfully architect, develop, and deploy e-business solutions will need to formulate and adopt a

comprehensive business plan Because of the critical role of Internet technologies and integration requirements,

it is recommended that organizations need a comprehensive planning framework—an actual e-business model This structured planning approach enables the organization to assess, plan for, and implement the multiple aspects of an e-business

Building an e-business (an integrated value chain) that leverages the Internet’s communications capabilities is a complex undertaking The complex integration requirements of the business solutions, all performing at

extremely high levels of availability and scalability, require an e-business model architectural approach The value chain (comprised of the traditional supply chain management functions, planning, procurement, and inventory management, coupled with the customer-facing functions, typically referred to as customer relationship management) has integration and performance demands that exceed the requirements seen in traditional businesses In a successful e-business, all of these areas are tightly integrated to provide an organization the ability to quickly and efficiently sell, manufacture, and deliver products or services

Furthermore, in a successful e-business, this value chain rests on a foundation that leverages the organization’s existing core operational business systems, as well as meets the new business-critical operational requirements for reliability, scalability, flexibility, and 24 × 7 × 365 availability in a highly volatile, electronic marketplace An e-business model includes three essential elements (see Figure 3.1)[ 1 ]:

Figure 3.1: E-business model components.

 Solid strategies

 Knowledge management techniques applied to a company’s information and intellectual assets

 Effective e-business processes typically grouped in the customer relationship management (CRM), supply chain management (SCM), and core business operations domains[ 1 ]

Solid Strategies

Strategy and execution are key to developing and sustaining a successful e-business Only those organizations that successfully integrate key business strategies and processes dramatically increase their efficiencies To be successful, organizations must also form the right strategic relationships and develop efficient business

processes with robust backend solutions that are able to meet users’ demands for real-time service today and into the future

In the past, businesses had the luxury of developing business strategies in the boardroom and IT strategies in the IT department They then brought these strategies together to run the overall business E-businesses cannot

afford this luxury The ability to react and change direction is critical Speed is everything Grounding the

organization with sound, winning strategies is key

In the new economy’s competitive electronic environment, it is easier for an organization to be global, but it is also harder to maintain consistency in the levels of services offered around the world E-businesses must be ready and able to adjust their business and IT strategies rapidly, depending on unpredictable competitors and market pressures Today’s e-business climate requires the continuous optimization of an organization’s business and IT strategies Because IT now has such a significant impact on every business process (from order taking to inventory to billing), both business and IT strategies are now developed in parallel

The best example of this is Dell Computer From the start, the company’s business strategy was tightly aligned with its IT strategy, allowing Dell to successfully integrate every aspect of its business (from order taking to inventory to billing) with both its customers and suppliers Dell vaulted to the forefront of its industry when it came

to market with a winning strategy, the unique just-in-time-delivery model Unlike traditional computer suppliers, Dell’s business strategy was founded on the premise of zero inventory

Similarly, online brokerage companies have been leaders in the area of integrating IT and business strategies The rapid adoption of Internet technologies combined with market globalization, industry deregulation, and media convergence has afforded these companies the opportunity to gain share and create value in the e-business marketplace

Turning an organization’s intellectual assets into knowledge is a key business differentiator In addition to a continually optimized business strategy, successful e-businesses must establish solid knowledge management practices Knowledge management is the definitive way to leverage an organization’s information and intellectual assets for business advantage It is the formalized, integrated approach that every organization must take to

“know” its business

Knowledge Management Techniques

Every business has both tacit and explicit knowledge One is undocumented, and the other is documented about what is “known” in the company This knowledge may include information about products and services or information about how the company works with a particular supplier No matter what type of knowledge an e-business has, the company must put into place processes for organizing that knowledge

Knowledge management includes managing intellectual capital, such as best practices, critical business

processes, and operating metrics Establishing ongoing processes for acquiring, organizing, and distributing this knowledge about customers, products, and processes is critical to success The business domains, CRM, SCM, and core business operations, are dependent on this information and these intellectual assets

Effective E-Business Processes

In every successful e-business, the business process domains (CRM, SCM, and core business operations) are

an integral part of the continuous optimization process The advantage and, thus, the return on investment for an e-business integrating its business process domains is that it extends the organization’s business directly to customers and suppliers

When business process domains are integrated, they can increase productivity and improve customer and supplier satisfaction For example, when a repeat customer views a successful e-business’s Web site, an

integrated CRM system presents that individual with offers or items of interest based on previous orders After the customer places an order, this same e-business allows that individual to view the status of his order in real time as it moves through the supply chain

Business process domains are aggregations of core business processes Although there is growing popularity of business process domains as their own entities (CRM, SCM, and core business operations), they are

commanding a mind-share in the marketplace (and each has attracted various vendors and products to support it) These domains must operate together as a key component to the overall e-business strategy (see Figure 3.2) [ 1 ]

Figure 3.2: E-business model business process domains

In a successful e-business, convergence is the driving connection of all of the business process domains When there appears to a customer or a supplier to be no barrier between departments, the business process domains are tightly integrated with the business and IT strategies

Customer Relationship Management

Customer relationships are becoming a more important factor in differentiating one business from another In order to stay competitive, e-businesses in every industry have begun to analyze these relationships with

customers using CRM solutions

In the past, customers would place an order via the telephone and wait until the company’s purchasing

department processed and shipped the order Today’s customers place an order electronically and then demand

to be able to check the status of their order within minutes

CRM enables an organization to adopt a comprehensive view of the customer and maximize this relationship These CRM systems enable a business to identify, attract, retain, and support customs centers, direct mail, and retail facilities In an efficient e-business, there are CRM processes in place to handle:

Analytical CRM: The analysis of data created on the operational side of the CRM equation for the purpose of

business performance management; utilizing data warehousing technologies and leveraging data marts

Customer interactions: Sales, marketing, and customer service (call center, field service) via multiple,

interconnected delivery channels and integration between front office and back office

Operational CRM: The automation of horizontally integrated business processes involving “front office” customer

touch points

Personalization: The use of new and traditional groupware/Web technologies to facilitate customer and

business partner communications[ 1 ]

Supply Chain Management

Integration of the SCM functions is emerging as one of the greatest challenges facing today’s e-businesses SCM

is the integration of business processes from end user through to original supplier The goal of SCM is to create

an end-to-end system that automates all the business processes between suppliers, distribution partners, and trading partners The new mantra for this process, according to industry analysts, is “replacing inventory with information.” In an effective e-business, the following SCM independent processes must be highly integrated (see Figure 3.3)[ 1 ]:

Figure 3.3: E-business model primary interactions

Demand management: These are shared functions, including demand planning, supply planning, manufacturing

planning, and sales and operations planning

Inbound/outbound logistics: These include transportation management, distribution management, and

warehouse management

Supply management: These include products and services for customer order fulfillment[ 1 ]

Core Operations

E-businesses also need to develop and operate complex transaction processing systems that support their core business operations (see Figures 3.4 and 3.5)[ 1 ] These core operations include the operational systems that support their particular business, such as claims processing, trade execution, enterprise resource planning (ERP), and enterprise resource management (ERM)

Figure 3.4: Manufacturing core processes

Figure 3.5: E-trailer core processes

Whether a company is just beginning to transform its business into an e-business or is an e-business

strengthening its market position, organizations must put in place architectures that support large and complex integrated solutions E-businesses must address the performance requirements for reliability, scalability, and high availability These systems also require a high level of flexibility, integration, and often the added complexity of operating in a global business environment These e-businesses need to integrate their customer relationship management, supply chain, and core business operational systems such as enterprise resource planning, accounting, and general business support systems to operate efficiently

Now, let’s look very briefly at types of e-business markets In other words, let’s look at how Web developers respond to your clients’ needs in an e-business-driven marketplace

[ 1 ]Agarwal, Bipin, “Defining the E-Business Model,” Tanning Technology Corporation, 4600 South Syracuse Street, Denver, CO 80237, March 22, 2000

E-Business Markets

Web sites and intranets are designed for the same reason—to provide information In the business world, this information needs to be updated and changed constantly in order to stay abreast of a changing business climate New product releases, price changes, and marketing promotions are just a few examples of information that companies need to constantly provide to their customers, suppliers, employees, and shareholders In today’s world of e-commerce and intense corporate competition, companies need the ability to instantly update published information in order to effectively communicate with their intended audience Today’s companies know that they have to have a dynamic and interesting Web presence, but they are struggling to find ways to effectively manage their Internet strategy Traditional advertising agencies and Web development firms are no longer meeting the all-encompassing Internet requirements necessary for businesses in today’s e-commerce-driven marketplace Companies are looking for advertising agencies and Web development firms that address their initial Web development needs while also providing them with viable, affordable solutions that are designed to address, implement, and manage their overall Internet strategy

Finally, historically, companies outsourced the development of their Web sites because creation and maintenance required design and programming expertise However, relying on third parties for all site maintenance limited a company’s ability to quickly and easily update their published information To solve this problem, many companies decided to bring Web site and intranet development in-house Companies then discovered that hiring the

necessary skilled personnel contains its own set of inherent problems Information

“bottlenecks” still occur when a company has one or two people in the internal IT department who are bombarded with the responsibility of publishing all company information In addition, companies are also finding that Web site designers are hard to find and even harder to keep The recurring theme in the market is that companies are recruiting individual Web designers

to build and maintain their Web sites and intranets in-house only to find that after several months of development, the designer may be lured away by the promise of a more exciting and rewarding career This “catch 22” has left companies looking for some additional

alternatives Companies are turning toward their advertising agencies and Web development firms to provide the solution to this problem Octigon provides the software that addresses this “catch 22” and enables Web developers to meet the increasing demands of the business marketplace Market trends have caused Web site management to become an arduous task, with sites evolving to meet the needs of e-commerce and e-business.