The e business handbook

Building Information Age Businesses for the 21st Century 3TABLE 1.1 Analyzing a Business Model An organization's business concept defines its: • Market opportunity • Product and servic

E-Business Handbook

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The e-business handbook / [edited by] Paul Benjamin Lowry, J Owen Cherrington, Ronald R Watson

p cm.

Includes bibliographical references and index.

ISBN 1-57444-305-4 (alk paper)

1 Electronic commerce 2 Business enterprises Computer network resources I Title: Ebusiness handbook II Lowry, Paul Benjamin III Cherrington, J Owen IV Watson, Ronald R V Title.

HF5548,32 ,E1742001

Before embarking on this journey commonly called “e-business,” it is important tonot get lost in the mind-boggling array of technologies, business strategies, andjargon Unfortunately, since the IT industry has started appending “e-” to almostevery word in Webster’s dictionary, a false illusion has been created that “neweconomic rules” exist So, while e-business represents a significant shift in academicresearch and business strategy (especially for trendsetters and followers), it is impor-tant to remember that this so-called revolution has been in the making for at least

50 years

Arguably, the e-business revolution may have started with the advent of frame computing (i.e., UNIVAC I in 1951), which was soon followed by computers’being built with transistors in 1958, and the introduction of procedural languages(e.g., COBOL in 1960 by Dr Grace Hopper) The revolution picked up steam withthe introduction of ARPANET in 1969 (providing the foundation for the Internet),followed by the production of large-scale integrated circuits (LSIs) in 1970, thecreation of the microprocessor in 1971 by Dr Ted Hoff of Intel, the release of theAltair home computer in 1975, and the introduction of the IBM PC in 1981 Therevolution further gained momentum with the introduction of the Mosaic Browser

main-by Marc Andreesen in 1993, the subsequent launch of Netscape and Linux in 1994,and the introduction of Java in 1995 In the 1990s, we witnessed the recombinantsynergistic application of many existing technologies (i.e., cryptology, packet-switching networks, protocols, standards, scalable servers, and relational databases)that finally caught the notice of mass markets and made e-commerce and e-businesshousehold terms But, given this history, can we really call e-business a radicalrevolution? — perhaps if you were sleeping through the last five decades

E-business is not so much a revolution as an acceleration of some of the lying fundamentals of economics and technology No economic rules have changed;instead, certain economic principles have been simplified or more strongly accen-tuated because of technological advances Thus, the rules of the game remain thesame: A firm must deliver quality products and services faster and cheaper than itscompetitors; likewise, it must post a reasonable profit, create tangible value, differ-entiate itself from competitors, provide excellent customer service, find ways toproduce “lock in” and to take advantage of network externalities Similarly, intel-lectual capital has always been important in strategic competition, but with e-business, it becomes increasingly crucial to strategic survival, as many firms nolonger trade in physical goods, but in ideas and services in a global arena

under-In the same way, while standards have been pivotal to business success for manydecades, they now have an increased importance Early on, the potential utility ofstandards was brought to light when gun manufacturers learned to utilize replaceableparts in the manufacturing process The importance of standards was further high-

lighted during the Industrial Revolution when standard widths were created forrailroad tracks and replaceable parts were made for gasoline engines Now standardscan be used to interconnect suppliers and customers to shore up vertical supplychains and to create value-added intranets and extranets Thus, a business focused

on e-business products or services cannot survive without embracing or creatingstandards that facilitate access to a critical mass of target users For example, a givene-mail system is virtually useless if it does not interconnect with hundreds ofdisparate e-mail systems Suppliers and customers need to be able to rapidlyexchange product and inventory data using preset exchange protocols

Ultimately, business is still about accurately delivering on transactions business now allows a much higher volume and more accurate quality to transferbetween companies much faster than was previously possible This nearly freneticpace has increased the need for integrated supply chains, partners, trust, security,and verification We call this electronic acceleration of internal and external busi-ness networks “e-business.”

E-This book presents leading research on a wide range of e-business topics such

as strategy, web development, net auctions, XML, emerging Internet-based ogies, virtual teams, international issues, intelligent agents, e-transactions, customerrelationship management and security Because of the multidimensional nature ofits content, this book is an appropriate manual for a wide range of academic andadvanced practitioner audiences For example, this book can be used for upper-division undergraduate courses in CS and MIS, for graduate courses in business ande-commerce, and as a professional primer

technol-Paul Benjamin Lowry

Editor

I would like to personally thank the international body of authors and researcherswho made this work possible Their persistence and hard work, conducted in a shortperiod of time, have enabled us all to benefit from the timely production anddistribution of this knowledge on e-business I would also like to thank my co-editors, Drs Owen Cherrington and Ronald Watson, for their outstanding work, aswell as Jessica Stant and Bethany Stevens for their administrative assistance More-over, I appreciate the support I have received from the Center for the Management

of Information (CMI) at the University of Arizona, including from Dr Queen Booker,

Dr James Lee, Dr Judee Burgoon, and Betty Albert Finally, I would like to thank

Dr Jay F Nunamaker, Jr for the vision that made CMI possible — for all of us,Jay is truly an international scholar, leader, friend, and visionary

Paul Benjamin Lowry

Editor

Paul Benjamin Lowry is a research associate at the distinguished internationalCenter for the Management of Information (CMI) at the University of Arizona, underthe direction of Dr Jay Nunamaker, Jr., a Regents Professor of MIS and founder ofGroup Systems.com CMI conducts leading research in collaboration, knowledgemanagement, and e-business Cumulative research over the years at CMI has pro-duced hundreds of research articles and scores of books, and many internationalhonors

Paul’s professional MIS and e-business experience comes from several Fortune

100 companies including Ernst & Young Management Consulting, Ameritech, ell, Price Waterhouse Management Consulting, and IBM His key clients haveincluded organizations such as 3M, Imation, Dial Corporation, the United Nations,the Wyoming Transportation Department, InfoPak, Pacific Telesis, Vanstar, Compu-terland, and PG&E Paul attended Brigham Young University, receiving a B.S inInformation Systems and later an MBA from the Marriott School of Management

Nov-He is scheduled to complete his Ph.D in MIS from the University of Arizona inApril 2002

At CMI, Paul conducts research emphasizing Internet-based collaboration collaboration), e-business, GroupWare/GSS, technology-assisted virtual teams, auto-facilitation, and distributed group work His current research involves creating tech-nologies and improved collaborative processes to enable distributed groups to effec-tively work together over the Internet

(e-J Owen Cherrington is the Mary & Ellis Distinguished Professor of Accountingand Information Systems at Brigham Young University He is currently the director

of the information systems faculty and programs in the Marriott School of ment, and the director of the Rollins Center for eBusiness

Manage-Dr Cherrington earned MBA and Ph.D degrees at the University of Minnesotawith an emphasis in accounting and information systems He is a CPA, a member

of the AICPA and the UACPA, and is licensed to practice public accounting in Utah

He was a principal in the management consulting division of Arthur Young & Co

Dr Cherrington has an extensive list of publications, including four major collegetextbooks in introductory accounting, cost and managerial accounting, informationsystems, and CPA review He has published more than 50 articles and monographs

in professional books and journals In addition, he has written training materials orconducted training programs for IBM, AICPA, Utah Association of CPAs, ArthurYoung, Ernst & Young, Alexander Grant & Co., Price Waterhouse, and BYU Con-ferences and Workshops

Dr Cherrington’s awards and recognitions have been numerous In 1997, hereceived the Marriott School Outstanding Professor Award He has been recognized

by the Marriott School for his outstanding teaching and awarded the NAC ing Faculty Award, Exxon Outstanding Teaching Award, William C Brown TeachingExcellence Award, and the Outstanding Educator Award given by the Utah Associ-ation of CPAs.

Outstand-Ronald Ross Watson is a professor at the Arizona Prevention Center in the Division

of Health Promotion Sciences, College of Public Health, as well as School ofMedicine and College of Agriculture at the University of Arizona His distinguishedcareer has led to the production of 450 journal articles and reviews and has includedmany distinctions, awards, and grants He has also edited 55 books He received hisPh.D in Biochemistry from Michigan State University and completed a postdoctoralfellowship at Harvard School of Public Health He currently directs research funded

by four National Institutes of Health grants He is also president of the companydeveloping natural products from plant extracts for sale via the Internet

Conan C Albrecht

Marriott School of Management

Brigham Young University

Provo, Utah

conan@byu.edu

W Steve Albrecht

Marriott School of Management

Brigham Young University

marriottschool.byu.edu/emp/joc/joc@email.byu.edu

Karen Clay

The Heinz SchoolCarnegie Mellon UniversityPittsburgh, Pennsylvania kclay@andrew.cmu.edu

Michael Doran

United Nations Center for Trade

Facilitation and Electronic Business,

Business Process Analysis Working

Houston, Texasbives@acm.org

Robert J Kauffman

Carlson School of ManagementUniversity of MinnesotaMinneapolis, Minnesotarkauffman@csom.umn.edu

Sara Kiesler

Human Computer Interaction Institute

Carnegie Mellon University

The Heinz School

Carnegie Mellon University

Jae Kyu Lee

Graduate School of Management

Korea Advanced Institute of Science

Paul Benjamin Lowry

Center for the Management

of Information (CMI)University of ArizonaTucson, Arizona Paul.Lowry@BYU.netPaul.Lowry@CMI.Arizona.EDU

Sanjay Kumar Madria

Department of Computer ScienceUniversity of Missouri-RollaRolla, MO

madrias@umr.edu

Mukesh Mohania

Department of Computer ScienceWestern Michigan UniversityKalamazoo, Michigan mohania@cs.wmich.edu

William T Neumann

Department of Management

Information Systems

Eller College of Business

and Public Administration

Robinson College of Business

Georgia State University

Steven E Roberts

Georgetown UniversityWashington, D.C

Ramesh Sambasivan

Itradefair.Com, Inc

Stillwater, Oklahoma Ramesh@Itradefair.Com

Ramesh Sharda

College of Business AdministrationOklahoma State University

Stillwater, Oklahoma sharda@okstate.edu

Simeon J Simoff

Faculty of Information TechnologyUniversity of Technology

Sydney, Australiasimeon@it.uts.edu.au

Michael Smith

The Heinz School

Carnegie Mellon University

Department of Management Science

and Information Systems

California State University

Long Beach, California

Kenneth R Walsh

Information Systems and Decision Sciences (ISDS) DepartmentLouisiana State UniversityBaton Rouge, Louisianahttp://www.kenwalsh.comkwalsh@lsu.edu

Bin Wang

Carlson School of ManagementUniversity of Minnesota,Minneapolis, Minnesota bwang@csom.umn.edu

Sai K Yayavaram

Department of ManagementMcCombs School of BusinessUniversity of Texas at AustinAustin, Texas

sai@mail.utexas.edu

Vladimir Zwass

Computer Science and Management

Information Systems

Fairleigh Dickinson University

Saddle River, New Jersey

zwass@alpha.fdu.edu

Chapter 1 Building Information Age Businesses for the 21st Century 1

Lynda M Applegate

Appendix A E-Business Models 19

Appendix B E-Business Revenue and Cost Models 29

Chapter 2 The Embedding Stage of Electronic Commerce 33

Vladimir Zwass

Chapter 3 Web Evaluation 45

Carsten Totz, Kai Riemer and Stefan Klein

Chapter 4 Supply Chain Management 67

G Prem Premkumar

Chapter 5 Online Auctions: A Closer Look 85

Alok Gupta and Ravi Bapna

Chapter 6 Bid Together, Buy Together: On the Efficacy

of Group-Buying Business Models in Internet-Based Selling 99

Robert J Kauffman and Bin Wang

Chapter 7 The Great Experiment: Pricing on the Internet 139

Karen Clay, Ramayya Krishnan, and Michael Smith

Chapter 8 Virtual Trade Fairs: An Emerging Internet Application 153

Ramesh Sharda and Ramesh Sambasivan

Chapter 9 Planning Business-to-Business E-Procurement Marketplaces 167

Jae Kyu Lee and Efraim Turban

Chapter 10 Internet Evolution and Social Impact 189

Sara Kiesler, Robert Kraut, Jonathon Cummings, Bonka Boneva,

Vicki Helgeson, and Anne Crawford

Chapter 11 Designing a Curriculum for the Death of E-Business:

Five Principles 203

Bradley C Wheeler

Chapter 12 Electronic Commerce Partnerships Between Business

and Academia 213

J Owen Cherrington and Brian Carini

Chapter 13 The Covered Bazaar on the Internet: Culturally

Specific Alternatives to “Web-Marts” 227

Fay Sudweeks and Simeon J Simoff

Chapter 14 Electronic Government 243

Yurong Yao and Blake Ives

Chapter 15 E-Business Goes Global: Institutional Environments

and Governance of Global Internet Firms 261

Sirkka L Jarvenpaa and Sai K Yayavaram

Chapter 16 Paradigm for Financial Modernization in E-Commerce 279

Martin Nemzow

Chapter 17 Knowledge Management in E-Services:

From Mass Customization to Service Individualization 297

Amrit Tiwana and Balasubramaniam Ramesh

Chapter 18 Preventing and Detecting Fraud

in Electronic Commerce Systems 315

W Steve Albrecht and Conan C Albrecht

Chapter 19 Protecting a Borderless World: Recognizing

and Understanding Security Threats to E-Commerce 339

Steven E Roberts and Dorothy E Denning

Chapter 20 The Critical Role of Independent Security Audits 353

Nahum Goldmann and Edward Orton

Chapter 21 Trusted Electronic Market Transactions:

A Macro- and Micro-Level View 365

Günther Pernul, Alexander W Röhm and Gaby Herrmann

Chapter 22 Development of Reliable E-Commerce Applications

in Large Open Distributed Systems 379

Rida A Bazzi and Feras Karablieh

Chapter 23 Distributed Software Component Integration:

A Framework for a Rule-Based Approach 395

Susan D Urban, Suzanne W Dietrich, Amy Sundermier, Ying Jin,

Sunitha Kambhampati, and Yinghui Na

Chapter 24 Collaborative Architectures that Support

Electronic Business 423

Conan C Albrecht

Chapter 25 A Business Component-Based Approach to E-Business

Process Design 443

Amitava Dutta and Tarun K Sen

Chapter 26 Reducing Distance in Electronic Commerce Using

Virtual Reality 457

Kenneth R Walsh

Chapter 27 XML, A Collaborative Enabler of E-Business through

the Mediation of Heterogeneous Data between Trading Partners 467

Paul Benjamin Lowry and William T Neumann

1-57444-305-4/02/$0.00+$1.50

Building Information Age Businesses for the 21st Century*

Lynda M Applegate

CONTENTS

1.1 Introduction 11.2 Business Models: Something Old and Something New 21.3 Emerging E-Business Models 41.4 Crafting Value Webs 91.4.1 Intuit Crafts a Value Web Inside its Organization 101.4.2 Intuit’s Value Web Extends to its Business Community 131.5 Putting the Ideas To Work 161.5.1 A Step-by-Step Approach to Analyzing Emerging

E-Business Models 16Appendix A: E-Business Models 19Appendix B: E-Business Revenue and Cost Models 29References 32

1.1 INTRODUCTION

A fundamental shift in the economics of information is under way — a shift that is less about any specific new technology than about the fact that a new behavior is reaching critical mass Millions of people at home and at work are communicating electronically using universal open standards This explosion in connectivity is the latest — and, for business strategists, the most important — wave in the information revolution A new economics of information will precipitate changes in the structure of entire industries and the ways that companies compete.1

Few would dispute that rapid technological advancements over the latterhalf of the 20th century spawned dramatic worldwide socioeconomic changes

By the mid-1980s, a new economic paradigm was emerging that many calledthe Information Age Its promise caused large established firms to embark uponbusiness transformation initiatives designed to shed static, rigid structures,

1

2 The E-Business Handbook

processes, and business mindsets that remained as a legacy of the IndustrialAge Today, as we stand at the gateway to a new millennium, the Internet andassociated technologies of the network era form the foundation upon whichInformation Age businesses are being built Initially, entrepreneurs and execu-tives in established firms approached the Internet in much the same way thatfortune seekers of the 1800s prospected for gold Although there are stillfrontiers to explore, the “gold rush” mentality has given way to a search forframeworks and analytics to guide us in building successful — and sustainable

— Information Age businesses

Drawing on more than 6 years of work with hundreds of Internet pioneers, thischapter analyzes how emerging Information Age business models are revolutionizingthe way business is conducted around the world Portals, aggregators, exchanges,and marketplaces are but a few of the models examined.*

1.2 BUSINESS MODELS: SOMETHING OLD AND SOMETHING NEW

If there is one lesson we can learn from the continuing evolution of work and tition in the new economy, it’s this: Change the question and you change the game The old question was, “What business am I in?” The new question is: “What is my business model?”2

compe-Why is a focus on business models so important today? If you think about it, wespent nearly a century building and perfecting the Industrial Age models that definedhow companies conducted business throughout most of the 1900s As a result, weknew what it meant if someone said, “I sell insurance” or “I sell cars.” We haddeveloped a shorthand way of describing how a business was structured, what type ofpeople were needed, and what roles they filled That shorthand told us how ourcompany interacted with others in the industry and, most importantly, how it mademoney and delivered value to customers, suppliers, partners, employees, and owners

It also told everyone who did business with us what they could expect The IndustrialAge business models became so familiar that they no longer required explanation

In contrast, the Internet enables us to create new business models and redefineexisting ones It provides a flexible channel for procuring and distributing prod-ucts and services and the tools needed to create and package content in all of itsmany forms, including data, voice, and video This highly interactive and engag-ing channel offers new opportunities and enables development of new capabilitiesthat were difficult to achieve before the commercialization of the Internet.Figure 1.1 shows the building blocks of a business model The categories ofanalysis and representative outcomes for each category

As you review the business model framework, it is important to recognizethat the components and relationships depicted here are not new Indeed, this

* This chapter is adapted from papers and materials in Professor Applegate’s Building E-Businesses

online course series (HB5 order #5238BN).

Building Information Age Businesses for the 21st Century 3

TABLE 1.1 Analyzing a Business Model

An organization's business concept defines its:

• Market opportunity

• Product and services offered

• Competitive dynamics

• Strategy for capturing a dominant position

• Strategic options for evolving the business

• Attract a large and loyal community?

• Deliver value to all community members?

• Price our product to achieve rapid adoption?

• Become #1 or #2?

• Erect barriers to entry?

• Evolve the business to "cash in on strategic options"?

• Generate multiple revenue streams?

• Manage risk and growth?

An organization's capabilities are built and delivered through its:

• People and partners

• Organization and culture

• Achieve best-in-class operating performance?

• Develop modular, scalable, and flexible infrastructure?

• Build and manage strong partnerships with employees and the community?

• Increase the lifetime value of all members of the community?

• Build, nurture, and exploit knowledge assets?

• Make informed decisions and take actions that increase value?

• Organize for action and agility?

Value is measured by:

• Benefits returned to all stakeholders

• Benefits returned to the firm

• Market share and performance

• Brand and reputation

• Financial performance

• Deliver value to all stakeholders?

• Claim value from stakeholder relationships and transactions?

• Increase market share and drive new revenues off existing customers?

• Increase brand value and reputation?

• Generate confidence and trust?

• Ensure strong growth in earnings?

• Generate positive equity cash flow?

• Increase stock price and market value?

4 The E-Business Handbook

basic approach has been used for decades to analyze a wide variety of industrialbusiness models What is new is the business rules and assumptions that form

As we define new models, we don’t immediately throw out the old In fact, thebest inventions leverage old paradigms, relaxing assumptions to define new mod-els that are both familiar and decidedly superior to the old.3 Scott Cook, founder

of Intuit, explained:

Some of the best innovations involve a paradigm shift, a real mental change of tions and certainties In fact, the process of innovating and entrepreneuring is much less about invention or new ideas It’s much more about rethinking and questioning the assumptions people already make.… The ability to rethink fundamental assump- tions and take what people accept as certain and question it is the central talent of being a great entrepreneur 4

assump-1.3 EMERGING E-BUSINESS MODELS

Consumers are looking for the ability to bundle the products they want in a fashion unique to each individual, and the Web will provide this capability We believe that vertical portals will do the best job of providing the consumer empowerment that the Internet makes possible Not only will vertical portals have a profound effect on traditional distribution networks, but because many vertical portals will have produc- tion capabilities, they may also pose a threat to specialty producers that choose to downplay the significance of the Internet channel.5.

For decades, executives have used the value chain framework (see Figure 1.2)

to define the set of activities through which products and services are createdand delivered to customers.6 Once activities are defined, it is then possible toanalyze the economics at each step in the chain by identifying both costs incurredand value created These activities can be located inside a firm or across firmboundaries In the latter case, activities may involve customers, suppliers, part-ners, or other stakeholders Accompanying the physical value chain is a related

Building Information Age Businesses for the 21st Century 5

information value chain through which involved parties coordinate and controlactivities

Participants within a business market assume one or more of four primary roles

to carry out these value-creating activities (see Figure 1.3):

1 Suppliers create component products or provide services, raw materials

or talent

2 Producers design and build products, services, and, most importantly,

and maintain the product or share that role with others in an industry orwith those outside traditional industry boundaries

3 Distributors enable buyers and sellers to connect, communicate, andtransact business These distributors may connect suppliers to businesscustomers, forming what is often called a supply chain, or they mayconnect producers to consumers, forming what can be called a buy

4 Customers might be either individual consumers or businesses willing topay for a product, service, or solution When selling to business customers,individual consumers — the actual end users — are often located insidethe customer firm This can create a two-stage adoption cycle — first thebusiness must decide to purchase a product or service and then individualsmust decide to use it

The point within a value chain where maximum economies of scale and scopeare created determines market power Economies of scale are achieved when a market

6 The E-Business Handbook

participant or network of participants is able to leverage capabilities and ture to increase revenues and profitability within a single product line or market

partici-pants is able to leverage capabilities and infrastructure to launch new product lines

or businesses, or enter new markets

Industrial Age business innovations favored producers The innovationsincluded:

• Physical or analog production and distribution technologies (machines,railroads, steam engines, telephones)

• An operating model (the assembly line, marketing, sales, and after-salesservice channels)

• A management model (the hierarchy)

• A social or regulatory system (specialized work, pay-for-performanceincentives, worker education, unions, antitrust laws)

As we enter the 21st century, Information Age pioneers such as AOL (now AOLTime Warner) are defining the business models that are reshaping the global businesslandscape and redefining power Once again, emerging models exploit the power oftechnological, business, and social innovations within a regulatory and policy frame-work — the latter of which emerges over time

Information Age business innovations include:

• Digital production and distribution technologies (broadband and wirelessnetworks, sophisticated content creation, flexible knowledge management)

• An operating model (integrated supply chains and buy chains)

• A management model (teams, partnerships, consortia)

• Social or regulatory systems (ownership incentives, freelancing, virtualwork, distance learning, digital copyright laws)

Although Industrial Age markets and power bases were built on proprietaryinfrastructure, participants within Information Age markets leverage a shared digital

exploit network economies of scale and scope Network economies of scale areachieved when a “community” of firms shares its infrastructure, capabilities, andcustomer base to produce and distribute products faster, better, and cheaper thancompetitors Network economies of scope are achieved when the community usesits shared infrastructure to produce and distribute new products and services, enternew markets or launch new businesses more quickly, at less cost, and more success-fully than competitors

The interorganizational IT systems of the 1980s and early 1990s (e.g., ican Airlines’ Sabre reservation system and American Hospital Supply Corpora-tion’s ASAP system) foreshadowed how network economics could create value.Because they were built using proprietary technologies, however, access, reach,and flexibility were limited Table 1.2 compares Industrial Age and InformationAge economics

Amer-Building Information Age Businesses for the 21st Century 7

The new e-business models emerging on the Internet can be classified withinone or more of the generic market roles (see Figure 1.4) In addition, the modelscan be grouped into two categories First, and most relevant for our discussion, are

category of e-business model comprises businesses that provide the platform uponwhich digital businesses are built and operated Appendix A describes the variousemerging e-business models and Appendix B summarizes revenue, cost and assetmodels It is recommended that the reader review these appendices before proceeding

to the next section

The e-business model classification presented above suggests that there is aseparation between companies that produce and sell technical infrastructure and

TABLE 1.2

Comparison of Industrial Age and Information Age Economics

Criteria for

Economic Success

Internal, proprietary and specialized economies of scale, and scope;

Economies of scope are limited

by the level of infrastructure specialization required

External, networked and shared economies

of scale and scope;

Economies of scale and scope are dramatically increased by the ability to build new businesses on the non- proprietary, flexible, shared and ubiquitous Internet infrastructure Core Technological

Innovations

Production technologies Distribution, communication and

information technologies, and the ability

to “assemble” component pieces Core Operating

Innovations

Standardization of work, job specialization, assembly line operations, value chain industry structure

Knowledge work, job expansion, work teams (face-to-face and virtual), extended enterprise, outsourcing and partnerships, value web industry and inter-industry structures

Core Management

Innovations

Hierarchical coordination structures and supervision, compliance-based control, pay-for-performance incentives, centralized planning and control

Networked coordinating structures, ownership incentives, information-based (“learning”) models of control, distributed planning and control

Societal Innovations Urban growth, mass

transportation, social security and welfare, unions, federal regulations, domestic economy

Work-at-home, self-employment, personal pension and savings programs, global economy

8 The E-Business Handbook

businesses that use the technology to support business strategy and design As wewill see in this chapter, however, the distinction is blurring as adoption of Internet-based business models penetrates to the very core of how firms do business IBM,AOL, Time Warner, Microsoft, and Intuit no longer just sell technology products;these companies are now content aggregators, portals, and media companies At thesame time, non-high-tech businesses, such as Charles Schwab, are becoming tech-nology infrastructure providers David Pottruck, co-CEO of Charles Schwab,explained: “[Charles Schwab] is a technology company that just happens to be inthe brokerage business.… If we are going to be successful, technology is going tohave to be built into our DNA.”

Another interesting feature of emerging e-business models concerns ships within an online market Traditionally, market participants performed theirroles sequentially Each participant in a value chain received inputs from thosedownstream, added value, and delivered outputs to the next participant in the chain

relation-As shown in the next section, in emerging Internet markets, this orderly sequence

of value-creating activities, transactions, and relationships may no longer apply.Participants in an e-business marketplace may assume more than one role and oftenrelate through a complex series of interdependent transactions and relationships thatare best modeled as a value web An excellent example of a value web in action can

be found by analyzing the multiple e-business models and relationships adopted byCitigroup (see Figure 1.5)

Initially, each business unit within the Citigroup family of companies (for ple, Citicard, Citibank, Travelers Insurance, and Salomon Smith Barney) strength-ened offline channels and integrated them with new online channels to market Thus,each business unit adopted a focused distributor business model By 2000, thecompany had combined these independent focused distributors within two verticalportals that provided customers with an integrated solution — one portal, myCiti,could be accessed directly on the Citigroup Web site and the other, AOL Citi Center,was available to individuals with accounts on America Online (AOL)

Building Information Age Businesses for the 21st Century 9

1.4 CRAFTING VALUE WEBS

The key to reconfiguring business models for the knowledge economy lies in standing the new currencies of value A value network or value web generates economic value through complex dynamic exchanges between one or more enterprises and its customers, suppliers, strategic partners, and the community These networks engage in more than just transactions involving exchange of goods and services, they also exchange knowledge and intangible value, for example, community, brand rec- ognition, and reputation.7

under-E-Businesses are built by artfully combining a variety of business models Thesebusinesses are then linked with others across multiple value chain networks to createwhat Frank Getman, CEO and president of HoustonStreet Exchange, refers to as a

“web for the Web.”8 By incorporating multiple business models that generate separaterevenue streams from the same infrastructure, a network of businesses can moreefficiently use resources, more effectively meet customer needs for integrated solu-tions, and drive additional value from the same level of investment By linking theweb of businesses inside a firm with a business network composed of a much largerweb of businesses, an organization can leverage the resources of the community to

10 The E-Business Handbook

further enhance value delivered to all members The evolution of Quicken.com,Intuit’s vertical portal for consumers, is an excellent example of how value websare crafted within organizations, industries, and markets

1.4.1 I NTUIT C RAFTS A V ALUE W EB I NSIDE ITS O RGANIZATION

In 1983, Intuit founders Scott Cook and Tom Proulx embarked on a quest torevolutionize the way individuals and small businesses managed their finances Adecade later, Intuit had emerged as the worldwide leader in the market for personaland small-business finance software Its Quicken (personal finance), QuickBooks(small-business accounting), and TurboTax software accounted for 70% or moremarket share in their respective markets

Intuit executives were quick to recognize the potential opportunities and threatspresented by the commercialization of the Internet, the World Wide Web (WWW),and user-friendly browser software They believed these technologies could beused to deliver new products and services and to dramatically expand the com-pany’s customer base and the range of products and services delivered Althoughthe market opportunity for Intuit’s traditional software business was estimated at

$300 million in 2002, the market opportunity for its online businesses was mated to exceed $202 billion.9 To exploit this opportunity, Intuit launchedQuicken.com in 1996

esti-Initially, Quicken.com operated as an information aggregator through whichconsumers could access financial services news and information from a number

of different information providers Quicken.com added value by synthesizing thecontent, categorizing it for easy search and retrieval, packaging it, and thendistributing it over the Internet to a rapidly growing network of consumers In aneffort to expand its customer base, Quicken.com executives decided not to chargeconsumers a subscription fee for its service, but, instead, would generate revenuesthrough advertising The more consumers visited Quicken.com, the more thecompany learned about what those consumers wanted, and the more valuable thesite became to advertisers

Between 1996 and 1998, six focused distributors were launched under theQuicken.com umbrella brand By summer 2000, Quicken.com logged an impressive

6 million visitors per month with 20 million regular users during the year Thebusiness models adopted by the six focused distributors within the Quicken.comvertical portal are described below

mar-ketplaces where consumers could purchase insurance, apply for andreceive loans, and pay bills online Revenues were primarily from suppli-ers that were charged a commission on each transaction Suppliers werealso charged development, consulting, and maintenance fees for systemintegration Advertising and referral fees provided additional revenues

could access information but could not invest online Revenues were

Building Information Age Businesses for the 21st Century 11

generated primarily from sponsors that were charged advertising andreferral fees

could purchase Quicken’s packaged software products online andcould immediately download the software and all documentation totheir personal computer Alternatively, a consumer could request thatIntuit ship the software in its traditional packaging, which includedprinted documentation

and advice, prepare tax returns and file online With the launch ofQuickenTurboTax, Intuit evolved its traditional packaged software busi-ness model to become an application service provider (ASP).* But,Intuit did not eliminate its traditional packaged software when it adoptedits online model In early 2001, consumers could buy TurboTax pack-aged software for $39.95 and prepare their taxes on a personal computer.The tax forms could be printed out and submitted manually or they could

be submitted online using QuickenTurboTax Alternatively, consumerscould bypass purchasing the software package and use QuickenTurboTax

to prepare and submit their taxes online Intuit saved money by shifting

to the hosted online software model, and it passed the savings to thecustomer There was no charge to prepare taxes online A fee of $9.95

to $19.95 was charged to file online Within 1 year of its launch in 1999,QuickenTurboTax for the Web had captured 80% market share for onlinetax preparation

Although not discussed in depth here, a second vertical portal, Quicken.com forSmall Business was launched in the late 1990s This vertical portal, or ASP, provided

a wide range of online services (including payroll, bookkeeping, invoicing, andpurchasing) to Intuit’s installed base of more than 2 million small-business users ofits packaged software QuickBooks By the summer of 2000, the ASP had more than

5 million users worldwide Once again, Intuit found ways to link its packagedsoftware to its online business and, as the number of Quicken for Small Businessusers grew, so too did the user base for QuickBooks packaged software, whichincreased to 3 million

During 2000, Intuit earned almost $300 million from its online businesses, andthe majority of these businesses were profitable Figure 1.6 provides an overview ofIntuit’s consumer business models in summer 2000

Each Intuit online business leveraged a common infrastructure to generate tiple streams of revenues while also building knowledge assets and strengtheningthe brand — not just for Intuit but for all members of its value web (see Figure 1.7).Because the Internet and its associated technologies offered a common standardized

mul-* An application service provider, or ASP, provides online access to business software applications Rather than buy a software package or build custom software that is then run on a personal computer or

in a company’s data center, an organization pays a fee to access software that runs on computers that are managed by an independent service provider.

12 The E-Business Handbook

Building Information Age Businesses for the 21st Century 13

interface for linking value webs inside and outside the organization, Intuit’s based digital infrastructure provided a modular platform upon which individualbusinesses could be integrated and built The marginal cost of adding a new business

Internet-to the infrastructure was low, and the revenue potential increased dramatically Overtime, new businesses could be built, launched, and grown to scale in months,dramatically increasing the company’s agility and innovation potential while dra-matically decreasing risk

1.4.2 I NTUIT ’ S V ALUE W EB E XTENDS TO ITS B USINESS C OMMUNITY

The Quicken.com and Quicken for Small Business value webs do not stop at thedoor of the organization Instead, these two vertical portals and the individualonline businesses within them unite a network of suppliers, partners, and custom-ers For example, in the fall of 2000, QuickenInsurance linked 50 insurance carriersuppliers to more than 500,000 visitors per month Approximately 30% of itsvisitors came through Quicken.com, 20% through AOL, and 17% through its 55other distribution partners.10 Indeed, America Online was a key member of theQuicken.com value web and, as such, AOL’s success increased the success ofQuicken.com (see Figure 1.8)

Founded in 1985 as Quantum Computer Services, the AOL.com online mation service was launched in 1989 as a proprietary news, information, commu-nication, and entertainment service From the beginning, AOL also served as anetwork services provider, giving away its content and community services whilecharging per-minute network-access fees

infor-In summer 1995, AOL had approximately 500,000 members in the United States,revenues of $344.3 million, and was losing money Losses continued as AOL shiftedfrom a proprietary to an Internet infrastructure, and as it shifted its revenue model

to a flat monthly fee During 1997, the company lost almost $500 million, and manydoubted that it would survive its painful evolution to an Internet business model.But survive it did, and, by the summer of 2000, AOL had more than 23 million

14 The E-Business Handbook

members worldwide (approximately 35% of total worldwide Internet users), nues of almost $7 billion, profits of almost $2 billion, and over $1.5 billion in cash.The completion of the merger with Time Warner in January 2001 was expected togenerate an additional $1 billion in equity cash flow to investors by the end of 2001.11

reve-Even before the merger with Time Warner, AOL had evolved a complex businessmodel To most consumers, it was a horizontal portal that enabled free access to theInternet and its “World Wide Web” of businesses, information, and services anywhereand anytime Revenues for this component of the business model were collectedfrom advertisers and sponsors For example, Intuit paid AOL $16.2 million in 1998

to become the exclusive provider of personal and small-business financial serviceswithin AOL’s Finance Web Center It also paid a “click through” fee every time anAOL customer accessed its Quicken.com and Quicken for Small Business verticalportals through AOL Finally, AOL received a percentage of every transaction con-ducted on Quicken.com by AOL customers In early 2001, Quicken.com was one

of 25 vertical portal web centers offered through AOL, and AOL commanded 20 to25% of worldwide online advertising revenues.12

In addition to providing a gateway to content and services, AOL’s businessmodel also reflected its roots as a proprietary network services provider With thelaunch of its Internet service in the mid-1990s, it quickly became a leading Internetservice provider (ISP) In this role, it developed and maintained the networkinfrastructure and services that enabled individuals to access the Internet across

Building Information Age Businesses for the 21st Century* 15

16 The E-Business Handbook

telephone (dial-up) or high-speed (broadband) networks The completion of the

merger of AOL and Time Warner in January, 2001 created the complex

online/offline media conglomerate shown in Figure 1.9.13

Because it provides a common infrastructure for sharing information and

coor-dinating business transactions, the Internet dramatically increases the ability to create

value webs like those of Quicken.com and AOL Time Warner And, like the spider

webs upon which they were modeled, these networked value webs, although they

may appear delicate on the surface, are surprisingly strong, “sticky,” flexible and

resilient But, as multiple new business webs are added, the complexity of managing

these dense networks of relationships increases It remains to be seen whether

complex multimodel businesses such as AOL Time Warner will be able to achieve

the synergies that appear so powerful on paper

1.5 PUTTING THE IDEAS TO WORK

It is just an incredible time to be in business and have the rules of business changing

… For many years, we operated under a pretty consistent set of rules They evolved

maybe … but now they’re morphing and that presents a situation that challenges

entrepreneurs to figure out: Are these rules real, or are they temporary? Should we

respond to them? Do we create new rules? How do we run a company in a world like

this when we have 13,000 employees trying to figure out where we are going and what

we should do?14

If you think about it, we spent most of the 20th century creating the business rules

that were used to build and run a successful company in the Industrial Age And,

we spent the last two decades breaking those rules Today, as we enter the 21st

century, we’re searching for new business models that enable a company to achieve

the efficiency, power, resources, and reach of being big, and the speed, agility, and

responsiveness that comes from being small

As executives attempt to sort through the options available for building firms

that can compete and succeed in the 21st century, they are finding that it is becoming

less important to watch the actions of competitors and more important than ever to

make decisions based on a deep understanding of the “business fundamentals” that

define the structure and dynamics of markets, industries, and the organizations that

compete within them The business fundamentals that guide strategic decision

mak-ing and action are discussed in this chapter The followmak-ing steps can be used to help

guide business model analysis

1.5.1 A S TEP - BY -S TEP A PPROACH TO A NALYZING E MERGING

dynamics, industry and competitive dynamics, business context and risk,

product/service positioning, basis of differentiation, and evolutionary

Building Information Age Businesses for the 21st Century 17

potential (e.g., strategic options) The analysis of the concept provides the

foundation for developing a pricing model and revenue forecast

Assess the ability to attract, engage and retain key stakeholders; the

appropriateness of operating and marketing plans; and the proposed

infra-structure requirements The analysis of the business design provides the

foundation for developing cost forecasts

benefits to all stakeholders, revenue, cost, and asset models, profit model,

cash flow projections, break-even timing, and financing needs Check the

consistency of assumptions used to build the financial model with the

opportunity and resource analysis

4 Use the analysis as a benchmark to develop real-time performance

mon-itoring systems

5 Revise the plan and performance measurement systems on an ongoing basis.

1-57444-305-4/02/$0.00+$1.50

Appendix A

E-Business Models

A-1.1 FOCUSED DISTRIBUTORS

Focused distributors provide products and services within a specific industry ormarket niche For example, E-Loan is a marketplace that connects buyers and sellers

in the financial services industry and landsend.com is an online retailer that sellsclothing and accessories The five types of focused distributor business models —retailers, marketplaces, aggregators, infomediaries, and exchanges — are differen-tiated from each other by the following characteristics

Differentiating Features

• Does the business assume control of inventory?

• Does the business sell online?

• Is the price set outside the market or is online price negotiation and biddingpermitted?

• Is there a physical product or service that must be distributed?

Focused Distributor E-Business Trends

• Focused distributors that do not allow customers and the business munity to transact business online are losing power

com-• Aggregators are evolving to marketplaces or vertical portals

• Multiple business models are required to ensure flexibility and ability

sustain-• Focused distributors must align closely with vertical and horizontal portals

or evolve their model to become vertical portals

A-1.2 PORTALS

The American Heritage Dictionary of the English Language defines the term portal

as “a doorway or gate—especially one that is large and imposing.”15 To many, thisdefinition seems a fitting description of the portal business model that has emerged

on the Web Although the terminology is rather recent, the earliest online businessportals (for example, American Hospital Supply’s ASAP and American Airlines’Sabre) were launched in the late 1960s and 1970s.16 Online consumer portals (forexample, America Online and CompuServe) emerged in the 1980s with the adoption

of the personal computer Built on proprietary technology, these pre-Internet portals