Strategic & Tactical Tools for Ebusiness

Definition according to Osterwalder et al (2010) :

• A business model describes the rationale of how an  organization creates, delivers and captures value.

Definition according to Laudon & Travers:

• Business model is a set of planned activities designed to result in a profit in a  marketplace
• E-Commerce Business Model: Uses / Leverages unique qualities of Internet, Web and Mobile

Combined:

• Business model is an description and explanation of how a business makes money

Value proposition—how a company’s product or service fulfills the needs of customers. Typical e-commerce value propositions include personalization, customization, convenience, and reduction of product search and price delivery costs.

Revenue model—how the company plans to make money from its operations. Major e-commerce revenue models include the advertising model, subscription model, transaction fee model, sales model, and affiliate model.

 Market opportunity—the revenue potential within a company’s intended marketspace.

Competitive environment—the direct and indirect competitors doing business in the same marketspace, including how many there are and how profitable they are.

Competitive advantage—the factors that differentiate the business from its competition, enabling it to provide a superior product at a lower cost. E.g. Superior product or bring the product to market at a lower price than competitors

• Asymmetry, first mover advantage, complementary resources (marketing, financial assets, reputation)

 Market strategy—the plan a company develops that outlines how it will enter a market and attract customers.

Organizational development—the process of defining all the functions within a business and the skills necessary to perform each job, as well as the process of recruiting and hiring strong employees.

Management team—the group of individuals retained to guide the company’s growth and expansion.

E-tailer: Online version of traditional retailer: 

• virtual merchant, bricks & clicks (web shops of existing brick-and-mortar stores), manufacturer direct
• Low entry barriers -> Much competition, difficult to differentiate and to become profitable
• Main revenue model: Sales

Community Provider: Provide online environment (social network)  where people with similar interests can transact, share content, and  communicate

• Facebook; LinkedIn; Twitter etc
• Main revenue model: Hybrid (Advertising, subscription, affiliate referral)
• Good for targeted marketing/advertising (special audiences)
• Often rely on word-to-mouth and offline relationships between the members

Content Provider: Digital content on the web

• newspapers, films, music, games, books etc
• Main revenue model: Advertising, subscription, sales
• Key to success: Be content owner (having the copyright), distributors of content have to pay fees

Portal: Search plus an integrated package of content and services: 

• Yahoo, AOL, MSN, Facebook(?), Chinese Platforms???
• Horizontal vs Vertical vs Search
• Main revenue model: Advertising, subscription, transaction

Transaction Broker: Process online transactions for consumers. E.g  stockbroking & travel 

• E*Trade, Booking.com,
• Main revenue model: Transaction fees
• Privacy, trust, customer experience are important factors to attract new customers
• Every transaction that occurs -> fee for broker -> important to encourage to make a lot of transactions

Market Creator: builds a digital environment where buyers and sellers can meet, display products, search for products, and establish a price for products:

• eBay, Amazon etc
• Main revenue model: Transaction fees
• Seller and buyer are their own agents (market creator is not executing the transaction, unlike as a transaction broker)
• Gets a commission fee on every transaction -> middleman

Service Provider: Making money by selling online services

• e.g. RocketLawyer
• Variety of revenue models (Sale of services, subscription, advertising, freemium…) 
• VP: valuable, convenient, time-saving, low-cost alternatives to traditional service providers or unique experience
• Service-based economy and society -> potential of services > products
• Increasing demand for convenient services
• Trust and confidence are critical 

E-Distributor:

• Company that supplies products and services directly to individual businesses
• Recommendable to offer a wide product range as one-stop shopping is preferable
• Make money from sale of goods

E-Procurement:

• Create and sell access to digital markets
• Fees for market making services, supply chain management, and fulfillment services

Exchange

• Independent digital marketplace where many suppliers sell to a few commercial purchasers

Industry Consortium

• Industry-owned vertical marketplaces for specific industries (e.g. automobile, aerospace)

Private industrial networks

• Digital network designed to coordinate the flow of communications among business partners (e.g. company and its long-term trusted suppliers)

The activities and organisation engages with in order to generate money. 

Revenue side:

• Value proposition: describe the features of a produt or service that attracts the customers
• Customer segment:
• Channels: through which the product or service are made available to customers
• Customer relationship: Customer communicaton, CRM etc
• Revenue streams: what creates renevue

cost side -> activities that are needed in order to enable the revenue side

• Key partnerships: looking at what activities are best outsourced or done within the organisation
• Key activities / key resources: resources that are needed in order to maintain a competitive advantage

Industry structure determined by Porter's 5 forces

• Rivalry among existing competitors ⇒  threat of substitute products, barriers to entry into the industry, bargaining power of suppliers, bargaining power of buyers

Change in industry structure:

• Middlemen such as Expedia entered the travel market and leveraged e-commerce successfully. Reaction of airlines: platform for direct consumer sales (e-Commerce lowered barriers of entry
• New forms of distribution by new entrants have shaken up many industries though (e.g. Wikipedia = free, Encyclopedia = 100s of euros)
• E-commerce increased price competition in nearly all markets due to more competition and greater price transparency
• Merchants automatically compete on bigger markets as international internet users can connect to their websites
• But also more possibilities of branding and differentiation which allows to retain high prices

Changes in industry/ firm value chain (set of set of activities performed in a firm/ an industry that transforms raw inputs into final products and services):

• Every player is in a position where it can maximize its profits by lowering costs or increasing prices
• E.g. Manufacturers can create B2B exchange
• E-commerce enables firms to differentiate their products and to increase operational efficiency (e.g. outsourcing, differentiate services and products)

Business strategy = a set of plans for achieving superior long-term returns on the capital invested in a company

5 generic business strategies:

• Product / Service differentiation
  • Tactics to differentiate: create experience expectations about use of products or service, adding unique features, personalization of experiences, customize products on customer demand, possibility to order from anywhere/anytime (ubiquity) to anywhere in the world (global reach)
• Cost Competition
  • Cost reduction most likely happens due to the discovery of a unique set of business processes or resources that other firms cannot obtain → Competitive advantage
  • Leverage E-commerce to cut costs, but competitors usually have access to same technologies
• Scope
  • Competing in all markets worldwide, rather than just national or local (Ubiquity, universal technical standards)
• Focus / niche strategy
  • E-Commerce allows to create very specific, interactive and perfectly targeted ads to potential customers of that segment (leveraging information density, richness and interactivity)
• customer intimacy
  • Develop strong ties with customers in order to increase switching costs (leveraging information density, richness, interactivity, and social media

Disruptive Technologies: Technologies that fundamentally change the way business is done

Digital Disruption: Business model is fundamentally changed due to a change in digital technologies (information systems)

Sustaining technologies: Technologies used improve a business model -> incremental improvement of products and services

Stage 1: Innovative companies use the technology to build a new product/service that is less capable, of poorer quality but less expensive than an incumbent offering -> finds a niche market, not served by incumbent

Stage 2: Disruptors improve their products using more innovative technologies than traditional players. Disruptors move fast, expand their market and eventually capture market share from incumbents

Stage 3: New products and business models become superior to incumbent’s offerings

Stage 4: Incumbents lose so much market share that they might go out of business, are merged with other companies…

Monetizing under utilized resources

• Amazon selling its spare server capacity as Cloud  Computing Services

“Servitization”

• Selling the product as a service – Roll’s Royce Jet Engines

Ownership to rental

• Shifting from ownership of an asset to rental of  an experience - Spotify

Offline to online

• Substituting physical with “virtual” digital  encounters – Netflix

Mass customization and co-  creation

• Enabling consumers to bespoke and co-create  product experience – Mobile Phones (apps)

Experience Innovation

• Moving from selling a commodity - Starbucks(!)

o   Continuous digitalization of all business aspects -> company can create value by optimizing business processes, collaborating with partners in the value chain… → more data to optimize based on

o   Increase in digital natives → larger customer base

o   Voice of customer becomes more important (e.g. review systems, social media)

• Difficult to assess in offline stores, easy in online

Content (What is consumed?)

• Information: Product information, price and use details
• Product: digital products such as e-book, software

Experience (How is it packaged?)

• Recommendations, interface, customer-facing digtalized business processes

Platform (How is it delivered?)

• Coherent set of digitized business processes, data and infrastructure. External (telecom networks, computers, logistics…) and internal (e.g. customer data, HR, Finance) components

Network externalities arise when one market participant affect others without compensation being paid

E.g. Facebook: intrinsic characteristics are not that important, but the network effect provides high value. Lots of users on fb and by joining oneself, one adds additional value for other users and makes it more attractive. This is the principle of positive feedback.

This causes a snowball effect. The more users fb has, the more attractive it gets. And the more attractive fb is, the more users sign up again. 

Positive feedback: the stronger gets stronger, the weaker gets weaker

But can also adversely affect --> negative feedback.

1. Brand selection

• Searching for new product, consultation of reviews, peers

2. Sampling

• physical sampling

3. Entrenchment

• purchase decision, and start of use, getting used of new features, software, etc. 

4. Lock-in

• because of entrenchment phase, getting locked in to specific supplier

Brand specific training

• Considerable additional time and effort would be needed to train staff to use another technology from another brand
• By introducing new upgrades/features, the vendor can maintain high switching costs (if features are worth learning them)
• Learning a new system, both direct costs and lost productivity; tends to  rise over time

Search costs

• learning about quality of alternatives

Specialized suppliers

• Highly specialized products for which it will be difficult to find other suppliers

• Funding of new supplier may rise over  time if capabilities are hard to find/ maintain

Contractual commitments

• Contract to buy from a specific seller (requirement = exclusive, minimum-order size = minimum quantity

• Compensatory or liquidated damages

Loyalty programs

• “artificial lock-in”
• Awarded for return purchases
• Any lost benefits from incumbent  supplier, plus possible need to rebuild cumulative use

Durable purchases

• Replacement of equipment; tends to decline as the durable ages

• Economic lifetime of durable equipment impacts lock-in duration

Standards war = battles for market dominance between incompatible technologies

Standard wars crucial in markets with network effects

The higher the costs of a standard war, the more likely parties will negotiate on a common standard

4 types of standard wars, classified by how compatible each player’s proposed new technology is with the current technology

• Evolution strategy: Compatible with the old technology, offering slightly better product performance -> minimum of switching/adoption costs
• Revolution strategy: Incompatible with the old technology but new features and significantly better performance -> customers willing to switch at high adopting costs

•Control of an installed base (most important one)

• Big corporates have a large (loyal) customer base or locked-in customers
• This can be used to block cooperative standard setting or force a standards war
• Can be used to block competitors from offering compatible products, forcing them to implement a risky revolution strategy
• In startups often services or products for free, to create an installed base. Logic: build early lead, to leverage positive feedback (for you and against competitors)

•Intellectual property rights

• Valuable technology patents and copyrights -> strong position
• Normally patents > copyrights, but software copyrights can block compatibility

•Ability to innovate

• Build new intellectual property in the future
• Good engineering skills -> compromise on standards and out-engineer competition

•Manufacturing abilities

• Scale economies or strong manufacturing competences -> low-cost production
• Helps to survive standard wars (lower costs) or capture market share (low price -> more sales of standardized products)
• Benefit from open standards

•Brand name and reputation

• Brand name is a big asset in network markets and give one instant credibility -> helps to win the market

•Presence in complementary products

• Product that is highly complementary -> push for standards
• Acceptance of your technology will drive sales of other products you produce
• E.g. Intel wanted to sell more CPUs -> pushed for other standards for PC components, including interfaces between motherboards and CPUs, chipsets

First mover advantage

• First movers learn lessons earlier -> pole position
• Network effect kicks in when positive feedback is achieved with every additional customer of the network

Definition: occurs where users receive value from the fact that everyone else uses the same tool or product, all of which increase in value as more people adopt them (e.g. Windows, Mac, Facebook)

An MSP is a service, technology or product that lets two or more customer or participant groups have direct interactions. Examples of successful MSPs include PayPal, eBay, Alibaba and Facebook

retailers that sell products through a variety of channels and integrate their physical stores with their website and mobile Platform

Rise of multisided markets and network effects

• Increased numbers of customers in amazon leads to an increased number of amazon partners and their products. Amazon as the middleman benefits from an accelerated growth through positive network effects

Online Store front as limitless online catalogue

• Reduce frictions to purchase behavior
  •  Easy to search of products
  • One click purchase
•  Enables “infinite” shelf space -> businesses can service the long-tail through just in time delivery
• Interaction enables “trust” -> customer reviews
• Storefront = promotion space
  • Customer data -> recommendation engines

Disintermediation -> cut off middleman (wholesaler and retailer), which can save costs and time

Reintermediation:

• Creation of new intermediaries between customer and suppliers providing services such as supplier search and product evaluation
• Ex. Take-away Restaurant with delivery service switches to a food delivery company like deliveroo

Reduced search and transaction costs; customers able to find lowest prices

Lowered market entry costs, lower operating costs, higher efficiency

Traditional physical store merchants forced out of business -> ToysRUs

Some industries would be disintermediated

Emerging concepts:

Showrooming: Customers come into a store to review a product and then leave to purchase it online, often from another vendor

• The notion of “customer experience has emerged as being very important”

Supercharging: Connecting emotionally with the customer, as he visits a store and relates to the brand, leading to more spending

Omni-channel: convergence and integration of online and offline channels (different from multi-channel)

Virtual merchant

○Single-channel e-commerce firms that generate most of their revenue from online sales (often Platform business model)

○Must build a reputation from scratch - perhaps through online reviews. Savy in use with SoMe

○No physical store locations but face large costs in building and maintaining an order fulfillment infrastructure

○Low gross margins (like all of retail), high customer acquisition costs, steep learning curve for marketing

■The business needs efficient operations to make profits

○Common strategy: Low cost + convenience + effective and efficient fulfillment processes to ensure fast delivery

■Examples of virtual merchants: Amazon, eBay, ASOS

○New trend: virtual merchants with subscription revenue model

■Birchbox, Barkbox, whatever the fuck box

Bricks-and-clicks (Omni-channel)

• Have a network of physical stores as primary retail channel, but also have online offerings
  • Firms like: Walmart, Macy’s, Sears, Target
• While they face high costs of physical buildings and large staff, also have many advantages:
  • Brand name
  • National customer base
  • Warehouses
  • Large scale (giving bargaining power)
  • Trained staff
  • Experience in operating on very thin margins
  • Have invested heavily in purchasing and inventory control systems to control costs
  • Coordinating returns from multiple locations
• Acquiring customers is less expensive due to brand name
• Challenges include:
  • Coordinating prices across prices across channels
  • Handling returns of online purchases at retail outlets
  • Leveraging their assets on the web
  • Building a credible website
  • Hiring new, skilled staff
  • Building rapid response and order entry/fulfillment systems

Catalog merchant

• established companies that have a national offline catalog operation that is their largest retail channel, but who have recently developed online capabilities

• Their advantages:
  • Very efficient order entry and fulfillment systems
• Challenges are the same as brick and mortar stores:
  • must leverage existing assets and competencies to a new tech environment
  • Build credible online presence
  • Hire new staff

Manufacturer-direct

• single- or multi-channel manufacturers who sell directly online to consumers without the intervention of retailers.
• With direct sales, they risk to disintermediate current suppliers which could result in harm
• E.g. Apple, Dell, 
• Channel conflict occurs when retailers of products (stores also selling) must compete on price of inventory against the manufacturer (who sells directly to customer)
  • Manufacturer has the advantage of no stores, staff, or inventory
• Manufacturer-Direct firms have no marketing experience
• Don’t have a fast online order and fulfillment system in place
  • usually send bulk shipments up value chain
• Problems acquiring customers
• Coordinating supply chains with market demand
• They must switch from a Supply Push to a Demand Push model
  • Supply Push model - Products are made before orders are received and then stored in a warehouse
  • Demand push model - products are not build until order enters system
• Advantages include:
  • Owning brand name
  • Existing customer base
  • Lower cost structure because they are the creator of the goods, High Margins

1. Have a central Location to attract many shoppers
   1. A central website with good accessibility (SEO)
2. Charge high enough prices to cover costs of goods as well as marketing
3. Develop highly efficient inventory and fulfillment systems so you can offer goods at lower costs than competitors and still profit
   1. Supply chains can be a competitive advantage (supply chain simplification, lean, and just in time production ⇒ Value chain efficiency)
4. Customer behaviour
   1. Not only about price. Customers want convenience, time savings, access any time)
5. Integrated approach to offline and online is needed (omni-channel marketing)

6. Social commerce (social media), local e-commerce, and m-commerce are vital

   1. In combination with big data, people can be targeted based on their interests

Customers that visit the offline retail stores are supercharged

• Supercharging occurs when customers are nurtured in a small-footprint location that typically holds no inventory -- and fulfilled, initially (and subsequently, for repeat purchases), from an operationally efficient distribution center.

• Small stores act as showrooms, zero invertory and zero stock, order is fulfilled from warehouse and delivered to house of customers

• A customer who is exposed to the brand offline, rather than online, is not only more likely to peruse and sample a wider selection of product categories, but also is more immersed in the brand experience

• is saving costs and Retailers can generate store visits by implementing omnichannel initiatives, such as in-store pickup of online orders

MSP:

• One reason, undoubtedly, is the success of eBay--and of Rakuten and Taobao, eBay's counterparts in Japan and China, respectively.
• Another is that multisided platforms look financially more alluring than resellers.
• These marketplaces usually take a cut from each transaction, which goes almost straight to the bottom line.
• As a result, their operating costs are low and their percentage margins are high.

Re-seller

• Resellers must buy and then sell their offerings,
  • typically have higher revenues
  • but also higher capital and operating costs
    • Have to play for own deliveries, organize returns, etc
  • and lower percentage margins.

•Scale vs Scope

• High-demand products are sold more efficiently by one large reseller than by many small sellers.
• The reseller can capitalize on economies of scale in purchasing, infrastructure investments (in warehouses and distribution centers, for example), delivery, customer support, and so on

Aggregation Effects

• Some products and services have much higher value to buyers when bought together than when purchased separately from independent sellers.
• Resellers generally do better than multisided platforms (by bundling goods)

•Buyer & Seller Experience

• Multisided platforms generally create value by matching buyers with the right sellers and vice versa, and then enabling them to transact.
  • In some contexts, however, one side might not want to deal with multiple agents
  • Customer experience plays a large role in business success. The resller model enabled:
    • guaranteed fast delivery,
    • an extremely favorable and universal return policy,
    • reliable and standardized information about product characteristics and availability, and so on.
  • Customers on MSPs might not get the fast delivery or other qualities from varying entities
    • Differing service terms might annoy them
  • One-off sellers are at a tremendous disadvantage on multisided platforms:
    • They lack the expertise, credibility, and time to compete with the professional sellers in these marketplaces.

•Avoiding Market Failure

• Left to their own devices, marketplaces sometimes collapse.
  • The most obvious cause of a market failure is uncertainty about product quality or about the reliability of sellers or suppliers
  • Platform must establish a trust mechanism between parties
  • Another potential market failure of MSPs: one side has an information or bargaining advantage over the other
    • Fearful of being exploited, the weaker party is unlikely to participate

Transaction platforms (Match, Uber, Netflix)

• Digital intermediaries enabling information and services to be found and shared or bought across an ecosystem -> e.g. Marketplace -> Shared Economy Platforms
• Value creation – facilitating exchange of information and services between 3^rdparties
  • Matchmaking: value from increasing the size of the pool and then increasing the likelihood of a better match
  • Reducing friction: making interactions and transactions as easy as possible
  • Value Capture: Share of volume of transactions
• Strategic implications:
  • Architecturally Simpler
  • Easier to build from scratch
  • Simpler power dynamics in the ecosystem
  • (Generally)Cheaper to establish & sustain
  • Key risk
  • Failure to ignite network effects

Innovation platforms (AWS, Microsoft Azure)

• A collection of common functional building 6blocks that are shared with an ecosystem to innovate digital services -> e.g. Operating system, Salesforce
• Value Creation: Facilitating the innovation of new services by 3^rd parties
  • Opening up functional capabilities for 3^rd parties to innovate with
  • Resourcing developers with the capabilities they need to innovate
  • Value capture: Share of range and quality of innovation

Strategic implications

• Architecturally Complex
• Build on existing capabilities – Hard to build from scratch

e.g AirBnB

•“Merchant Side” - Easy monetisation of spare  resource / under-utilised assets

•“Customer Side” – 1) Lower Prices; 2) More interesting / genuine experiences

The Sharing Economy as “a system that activates the untapped value of all kinds of assets through models and  marketplaces that enable greater efficiency and access”  (Botsman, 2014)

Drivers by Constantiou et al (2017):

1. Allocation of idle resourcs

2. Access over ownership

3. Peer-to-Peer

Cusumano (2014) suggests the sharing economy is enabled by platform  companies that bring together

• Individuals who have under-utilised assets
• With people who would like to rent those assets short-term

Strategic similarities in platform types

• Rich ecosystems Requires cultivation to ensure successful platform growth – network effects etc
• Value creation and capture must be shared across  ecosystem to attract ecosystem members.
• Ecosystem requires governance in order to ensure  equitable share of value creation and capture –  boundary resources

Strategic differences in platform types

1) Transaction Platform                                       Innovation Platform

• Relatively common                                  Relatively rare
• Architecturally Simpler                             Architecturally complex
• Easier to build from scratch                     typically emerges from existing capabilities
• Platform is a service                                Platform enables many services
• In essence it is an application

1.The “ignition” of network effects to drive growth

• Making people benefit from more people joining, inducing a virtuous cycle
• Chicken & egg problem --> Which side should one attract first? e.g Mobilepay

2.Control over supply side offering.

• Balance of managing the control

• Managing the pricing mechanism or Managing the quality of the offering?

  • Should it be the platform owners to decide the price or the sellers?

Sharing economy platforms leverage organizational and market mechanisms in innovative ways to gain competitive advantages over incumbents

Factors:

1. Quality: Loose or right control over participants (organizational coordination mechanism into the platform user’s base) AND
2. Price: low or high rivalry (market coordination mechanism by the platform owner)

Tight control: e.g. standardizing procedures, issuing contracts

High rivalry: e.g. dynamic pricing based on supply and demand, recommending prices based on supply and demand

Low rivalry: e.g. standard prices, exchange of gifts, partially costs

Loose control: e.g. rewarding socially acceptable behavior, setting social values and community values

• Chaperones (loose control, high rivalry) --> AirBnB
• Franchisers (tight control, high rivalry) --> Uber
• Principals (tight control, low rivalry) --> Handy
• Gardiners (loose control, low rivalry) --> Couchsurfing

Organizational Coordination Mechanisms ->determine control exerted by platform

Market Coordination Mechanism -> determine rivalry between participants