Crafting Business Models

GHULAM MUHAMMAD

AHMED SHAH

NOOR ULLAH DAAVI

RABEEL TARIQ BASHER

EHSANULLAH

Group Member Names

Crafting the Network Economy Business Model

• Old economy question– What business am I in?

• New network economy question– What is my business model?

• Emerging networked technology enable us to create new business model and redefine existing ones.– IT can provide flexible channel for procuring and distributing products

and services – As well as the tools to create and package content in all its many forms

– Data, voice, video

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002.

Components of a Business Model

Chapter 2 Figure 2-1

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002. Chapter 2 Figure 2-1

Components of a Business Model (continued)

What is it? How will we? An organization's business concept defines its strategy. The concept is based on analysis of: 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? Evolve the business to "cash in on

strategic options"? Generate multiple revenue streams? Erect barriers to entry? Manage risk and growth?

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002. Chapter 2 Figure 2-1

Components of a Business Model (continued)

What is it? How will we? An organization's capabilities define resources needed to execute strategy. Capabilities are built and delivered through its: People and partners Organization and culture Operations Marketing/ sales Leadership/ Management

process Business

development/ Innovation process

Infrastructure/ Asset efficiency

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?

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002. Chapter 2 Figure 2-1

Components of a Business Model (continued)

What is it? How will we? A high-performing organization returns value to all stakeholders. This value is measured by: Benefits returned to all

stakeholders Benefits returned to the

firm and its owners 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?

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002. Chapter 2 Figure 2-2

Linking Strategy to Value

Classifying the Business Models• Producers– Design and build products and services that customer or market needs

• May sell, service, and support the product

• Distributors– Enable buyers and sellers to connect, communicate, and transact

business.• May assume control of inventory and resell a product, solution or service

(retailers, wholesalers).• May simply act as agents, connecting buyers and suppliers but no

assuming control of inventory (aggregators, marketplaces, and exchanges).

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002.Chapter 2 Figure 2-3

Classifying Network Business Models

Classifying the Business Models• Business Built on Networked Infrastructure– Focused distributors– Portals– Producers

• Business That provide networked Infrastructure – Infrastructure distributor– Infrastructure Portals– Infrastructure Producers

Business Built on a Networked Infrastructure• Focus Distributor– Provide products and services related to a specific

industry or market niche• E.g. InsWeb and E-Loan as focused distributors offering

products and services within the financial services industry.

• Staples.com was a focused distributor for office products and suppliers.

Classifying the Business Models• Five type of focused distributors business model– Retailer– Marketplace– Aggregator– Exchange– Infomediaries

Classifying the Business Models• These five types can differentiated by asking the following questions– 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 bidding permitted?– Is there a physical product or service that must be

distributed?

Classifying the Business Models• Focus Distributors: Retailers– E.g. ToysRus and Staples.com

• Assume control of inventory, set a nonnegotiable price to the consumer, and sell physical products online.

• The primary revenue model is based on product/service sales,

• The cost model includes procurement, inventory management, order fulfillment, and customer service.

Classifying the Business Models• Focus Distributors: Marketplaces– E.g. E-Loan and InsWeb

• Sell products and services but do not take control of the physical inventory.

• Sell products with a nonnegotiable price and complete sales online.

• The revenue model is based on a commission or transaction fee for sale.

• Usually e-link to supplier databases and transaction systems to ensure that transactions can be completed and revenue can be recognized.

Classifying the Business Models• Focus Distributors: Aggregators– E.g. Autoweb

• Provide information on products or services for sale by others in the channel.

• Allow a comparison of features and pricing but do not enable buyers and sellers to complete the final transaction

• The revenue model is based on referral fees and advertising

Classifying the Business Models• Focus Distributors: Infomediaries– Internet Securities

• Special type of aggregators that unites sellers and buyers of information-based products, such as news, weather, sports, and financial information.

• Transaction can be completed online because no physical product is involved

• Revenue model include subscription fee, advertising

Classifying the Business Models• Focus Distributors: Exchanges– eBay and FreeMarket

• May or may not take control of inventory• May not complete the final sales transaction online• The key differentiating feature of this model is that the price is not set; it is

negotiated by the buyer and the seller at the time of the sale.• The revenue, cost, and asset models vary depending on weather the

online exchange assumes control of inventory and completes the transaction.

• B2B auction exchanges such as FreeMarket charge transaction fees and supplement revenues with fees for consulting services.

• B2C and C2C exchanges often supplement transactions revenues with advertising revenues

Classifying the Business Models• Portals– “Door way”– Early Pre-Internet Portals

– American Hospital Supply’s ASAP– AA Sabre

• Online consumer portals– America Online– CompuServe

Classifying the Business Models• Types of Portals– Horizontal– Vertical – Affinity

Classifying the Business Models• The different types of portal can be differentiated by:

– Does the business provide gateway access to a full range of online information and services, including search, calendar, e-mail, instant messaging, chat, and other community-building tools

– Does the business provide access to deep content, products, and services within a vertical industry (e.g. financial services, travel, etc.)

– Does the business provide information and services for all types of users, or are information and services specific to a well-defined affiliation group (e.g. women, people selling or buying a home)

Classifying the Business Models• Horizontal Portals– Aol.com , Yahoo and Quicken.com

• Provide gateway access to the Internet’s vast store of content and services.

• Provide a broad range of tools for locating information and websites, communicating with others, and developing online communities of interest.

• Revenue models– Advertising– Transaction fee from multiple vertical solutions channels.– Strategic alliances with dial-up and broadband Internet service providers (ISP)

• Cost includes development, maintenance, and operation of infrastructure and content

Classifying the Business Models• Vertical Portals– E.g. Covisint and WebMD

• Provide deep content: a place to conduct business, learn, and shop; communicates and community-building tools

• Often composed of a variety of business models, all of which generate separate revenue streams.

– Advertising and referral fees if transactions are not completed online– Service fees and transaction fees may be generated if transactions

are completed online– Subscription fees may also be generated for unique content

Classifying the Business Models• Affinity Portals– iVillage.com and Realtor.com

• Provide deep content, commerce, and community features such as those found in vertical portal but these offerings are targeted toward a specific market segment.

• Some towards a specific gender• The revenue model is similar to vertical portals, cost,

and asset models are based on business model adopted by the portal

Classifying the Business Models• Producers

– Producers design and make also may directly market, sell, and distribute products, services, and solutions.

– Producers held the position of power in the traditional business market

– In contrast, the Internet and associated networked technologies of the Network Economy create wealth by connecting buyers and suppliers.

– Many believed that distributors would become the dominant players in the Network Economy.

• Gaining control of the distribution channel is a key success factor in the today

• Producers are also thinking of taking steps to recapture the position of power by forming coalitions with distributors

– Covisint in the automobile industry and Global Healthcare Exchange in the health-care industry.

Classifying the Business Models• Six categories of producers business model– Manufacturer– Service provider– Educator– Adviser– Information and new service– Producer portal

Classifying the Business Models• Differentiating between producers– Does the business sell physical products and/or

provide face-to-face services

– Does the business sell information-based products and/or services

– Does the business provide customized products and/or services

Producer Business Model• Manufacturer– Ford Motor Company and Procter & Gamble

• Design, produce and distribute physical products, components and parts

• The Internet and associated networked technologies has been used to streamline, integrate, coordinate, and control physical channels of production and distribution.

• Often these IT-enabled process redesign efforts often begin inside the organization and extend to connect customers, suppliers, and partners.

Producer Business Model• Service Providers– American Express and Singapore Airlines

• Offer a wide range of services offerings that may be delivered through multiple channels.

• Like manufactures of physical producer, service providers that offers physical services (e.g. car rental agencies, restaurants, etc.) often use it to streamline, integrate, coordinate, and control service delivery and to connect and share information with customers, suppliers, and partners.

• Service providers that offers primarily information-based services (e.g. financial services) can use IT to digitize service delivery.

Producer Business Model• Educator– DePaul, Harvard, and Virtual Universities

• Create and deliver online educational programs, products, and services.

• The ability to use the Internet and associate technologies to define new multimedia educational offerings and to customize those offerings to meet of individual and businesses is revolutionizing education.

• Distance will never replace face-to-face class room education offerings.

Producer Business Model• Advisers– McKinsey and Accenture

• Consulting and coaching services to business and individuals.

• Use online to extend the nature of the relationship with customers from a one-time consulting project to an ongoing education and advisory service.

• Online channels can used to disseminate knowledge, connect consultants with their clients, and create communities of interest.

Producer Business Model• Information and News Services– Dow Jones and Euromoney

• Create packages and deliver information through both online and offline channels and across multiple media formats

• Because information in all its many forms can be digitized, stored, and delivered to meet personalized needs, we convergence among polishing, television, radio, and information industries.

Producer Business Model• Producer Portal– Covisint and Global Healthcare Exchange

• Use the Internet and associated technologies to support all aspects of the production and distribution process

Value Chain Roles

Suppliers Producers Distributors Customers

Design & Build Connect

- Products - Buyers

- Services - Sellers

Businesses Built on Network InfrastructureBusiness Models Characteristics

Suppliers Producers Distributors Customers

1) Producers 1) Focused Distributors - Sell physical products or - Assume control of inventory? provide face-to-face service?

- Sell online? - Sell info based products or services? - Online negotiation or bidding?

- Provide customized - Physical product or service? products or services?

2) Portals - Provide gateway access to full range of online info & services?

- Provide access to deep content, products and services within vertical industry?

- Provide info and services to all types of users?

Businesses Built on Network InfrastructureBusiness Models

Suppliers Producers Distributors Customers

1) Producers 1) Focused Distributors - Manufacturers - Retailer

- Service providers - Marketplace

- Educators - Aggregator

- Advisers - Infomediary

- Information & news - Exchange service

2) Portals - Producer portals

- Horizontal

- Vertical

- Affinity

Businesses Providing Network InfrastructureBusiness Models Characteristics

Suppliers Producers Distributors Customers

1) Infrastructre Producers 1) Infrastructure Distributors - Manufacture computer or network - Assume control of inventory? components or equipment?

- Sell online? - Develop packaged software?

- Online negotiation or bidding? - Provide infrastructure services or consulting? - Physical product or service?

2) Infrastructure Portals - Provide "gateway access" to networks, data centers, or web services?

- Host, operate, and maintain networks data centers or web services?

- Provide access to hosted application services?

Businesses Providing Network InfrastructureBusiness Models

Suppliers Producers Distributors Customers

1) Infrastructure Producers 1) Infrastructure Distributors - Equipment/ component - Infrastructure retailers manufacurers

- Infrastructure market places - Software firms

- Infrastructure aggregators - Custom software and integration service providers - Infrastrucure exchanges

- Infrastrucure services2) Infrastructure Portals - Horizontal infrastructure portals

- Vertical infrastruture portals

“Charles Schwab is a technology company that just happens to be in the brokerage business. Everything we think about as we run our business has technology in the center of it with the goal of engineering cost down and service up…”

David Pottruck co-CEO of Charles Schwab

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/I rwin, 2002. Chapter 2 Figure 2-4

Approaches to Business Model Evolution

ExpandEnhance

ExtendExit

EnhanceAdd functionality or features to current

product/service offerings or improve performance of existing business

ExpandAdd new product/service offerings or enter new geographic markets

ExtendEnter new line of business and/or add new

business models

ExitExit a business or market or drop a

product/service offering