Summary of Chapter 5

Business model is a set of planned activities designed to result in a profit in a marketplace

Business plan is a description of a firm’s business model

 E-commerce Business Model is the uses of unique qualities of the Internet and Web

Eight Key Elements of a Business Model

1. Value Proposition (“Why should the customer buy from you?”)
    
Successful e-commerce value propositions:
  1. Personalization/customization
  2. Reduction of product search, price discovery costs
  3. Facilitation of transactions by managing product delivery
2. Revenue model (“How will you earn money?”)

Major types of revenue models:
  1. Advertising revenue model
  2. Subscription revenue model (Freemium strategy)
  3. Transaction fee revenue model
  4. Sales revenue model
  5. Affiliate revenue model
3. Market opportunity (“What market space do you intend to serve and what is its size?”)

Marketspace: Area of actual or potential commercial value in which the company intends to operate
Realistic market opportunity: Defined by revenue potential in each market niche in which the company hopes to compete and typically divided into smaller niches

4. Competitive environment (“Who else occupies your intended marketspace?”)

Competitor: Other companies selling similar products in the same market space and that includes both direct and indirect competitors
Influenced by:
  1. Number and size of active competitors
  2. Each competitor’s market share
  3. Competitors’ profitability
  4. Competitors’ pricing
5. Competitive advantage (“What special advantages does your firm bring to the market space?”)

Advantage: Is your product superior to or cheaper to produce than your competitors?
Important competitive concepts:
  1. Asymmetries
  2. First-mover advantage, complementary resources
  3. Unfair competitive advantage
  4. Leverage
  5. Perfect markets
6. Market strategy (“How do you plan to promote your products or services to attract your target audience?”)

Strategy: It is a detail on how a company intends to enter the market and attract customers. Best business concepts will fail if not properly marketed to potential customers

7. Organizational development ( “What types of organizational structures within the firm are necessary to carry out the business plan?”)

How firm will organize work: Typically, divided into functional departments. As the company grows, hiring moves from generalists to specialists

8. Management team (“What kind of backgrounds should the company’s leaders have?”)

A strong management team:
  1. Can make the business model work
  2. Can give credibility to outside investors
  3. Has market-specific knowledge
  4. Has experience in implementing business plans
Raising Capital
 
Seed capital: A form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company
Elevator pitch: A short description of an idea, product or company that explains the concept in a way such that any listener can understand it in a short period of time.
Traditional sources: 
  1. Incubators, angel investors
  2. Commercial banks, venture capital firms
  3. Strategic partners
Crowdfunding: A practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet
JOBS Act: A law intended to encourage funding of small businesses in the United States by easing many of the country's securities regulations

B2C Business Models

1. E-tailer (The online version of the traditional retailer) 

- Revenue model: sales 
- The barriers for entry are low
Variations:
  1. Virtual merchant
  2. Bricks-and-clicks
  3. Catalogue merchant
  4. Manufacturer-direct
2. Community provider (social network)

-Provide online environment (social network) where people with similar interests can transact, share content, and communicate such as Facebook, Twitter and Pinterest
-Revenue models: Typically hybrid, combining advertising, subscriptions, sales and transaction fees

3. Content provider

-Digital content on the Web such as news, music, video, text, artwork
-Revenue models: Use varieties of models, including advertising, subscription; sales of digital goods and the key to success is typically owning the content
Variations: 
  1. Syndication 
  2. Aggregators
4. Portal

-Search plus an integrated package of content and services
-Revenue models: Advertising, referral fees, transaction fees, subscriptions for premium services
Variations:
  1. Horizontal/general
  2. Vertical/specialized (vortal)
  3. Search
5. Transaction broker
- Process online transactions for consumers 
- Value proposition: Saving time and money 
- Revenue model: Transaction fees
Industries using this model:
  1. Financial services
  2. Travel services
  3. Job placement services
6. Market creator

- Create a digital environment where buyers and sellers can meet and transact such as eBay
- Revenue model: Transaction fees, fees to merchants for access
On-demand service companies (sharing economy): platforms that allow people to sell services such as Uber, Airbnb

7. Service provider

-Online services provider such as Google (Google Maps, Gmail)
-Value proposition: Valuable, convenient, time-saving, low-cost alternatives to traditional service providers
-Revenue models: Sales of services, subscription fees, advertising, sales of marketing data

B2B Business Models

1. E-distributor

-The version of the retail and wholesale store, M R O goods, and indirect goods that are owned by one company seeking to serve many customers such as Grainger
-Revenue model: Sales of goods

2. E-procurement

- Creates digital markets where participants transact for indirect goods such as Ariba
- B2B service providers, SaaS and PaaS providers
- Scale economies
-Revenue model: Service fees, supply-chain management, fulfilment services

3. Exchange

- Independently owned vertical digital marketplace for direct inputs
- Revenue model: Transaction, commission fees
- Create a powerful competition between suppliers and this tend to force suppliers into powerful price competition thus the number of exchanges has dropped dramatically

4. Industry consortium

- Industry-owned vertical digital marketplace open to select suppliers such as SupplyOn
- More successful than exchanges as it is sponsored by powerful industry players and it strengthens traditional purchasing behaviour
Revenue model: Transaction, commission fees

5 . Private industrial network

-Digital network used to coordinate among firms engaged in business together such as Walmart’s network for suppliers
-Typically evolve out of large company’s internal enterprise system (Key, trusted, long-term suppliers are invited to the network)

How E-Commerce Changes Business

- E-commerce changes industry structure by changing:
  1. Rivalry among existing competitors
  2. Barriers to entry
  3. The threat of new substitute products
  4. Strength of suppliers
  5. Bargaining power of buyers
- Industry structural analysis

Industry Value Chains

- Set of activities performed by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services
- Internet reduces the cost of information and other transactional costs thus lead to greater operational efficiencies, lowering cost, prices, adding value for customers




Firm Value Chains

- Activities that a firm engages in to create final products from raw inputs and each step adds value
- Effect of the Internet:
  1. Increases operational efficiency
  2. Enables product differentiation
  3. Enables precise coordination of steps in the chain


Firm Value Webs

- Networked business ecosystem that uses Internet technology to coordinate the value chains
of business partners
- Coordinates a firm’s suppliers with its own production needs using an Internet-based supply chain management system


Business Strategy

- Plan for achieving superior long-term returns on capital invested that is profit
- Five generic strategies:
  1. Product/service differentiation
  2. Cost competition
  3. Scope
  4. Focus/market niche
  5. Customer intimacy
E-Commerce Technology and Business Model Disruption

Disruption: 
  1. Disruptive technologies
  2. Digital disruption
  3. Sustaining technology
Stages:
  1. Disruptors introduce new products of lower quality
  2. Disruptors improve products
  3. New products become superior to existing products
  4. Incumbent companies lose market share

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