What’s different about EBusiness?
E-Business require two forms of convergence:
Technical level: convergence of multiple
technologies into an integrated electronic
infrastructure to conduct business.
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The internet
The global telephone system
The communication standard TCP/IP
The addressing system of URLs
PC
Database of product and customer information
Multimedia sound and graphics
Universal use of browsers
• Business capabilities within and among
firms:
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The integration of business processes
Workflows
IT infrastructures
Knowledge
Data assets
E-business will drive organization to provide
single point of contact to customers via
electronic integration.
E-business model
A description of the roles and
relationships among a firm’s customers,
allies, and suppliers that identifies the
major flows of product, information,
and money, and the major benefits to
participants.
Atomic E-Business Model
 Direct – to – Customer
 Full – Service Provide
 Portals, Agents, Auctions, Aggregators, and Other
Intermediaries
Direct – to – Customer
 Types of Direct – to – Customer E-Businesses
 Direct – to – Customer E-Business model schematic
 Case Study – CDNOW
 Logistic Challenge & Channel Management
 INFRASTRUCTURE
 Strategic Objective and Value Proposition
 Sources of Revenue
 Critical Success Factors
 Core Competencies
Dell.com
 In 1994, Dell pioneered the use of the internet as a channel.
 Internet accounts for more than 50% of its revenues.
 Business and individual customers
 By removing dealer and distributors, Dell sells equivalent
computers at higher margins than the competitors.
 Removing intermediaries also reduces time to market for
new products.
 (1995 – 99)Average annual sales growth was 52% for Dell
and 25% for Compaq. Dell’s margin was 5% higher than the
industry average overall.
 Dell’s customers are 90% businesses and 10%
individuals.
 Dell uses the internet effectively to deliver different
value propositions to different segments within both
B2C and B2B marketspaces.
 For transactional customers (approx. 30%) who need
to be acquired
Types of Direct – to – Customer EBusinesses
 Space - based firms (dot coms) selling their own
branded products such as RealNetworks.
 Place-based firms also operating over the Internet,
selling their own branded products.
 Gap, Lands’ End, Gillette and Nike
 Place-based firm selling third-party products both in
physical outlets and on internet, such as Barnes &
Noble
 dot-coms selling third-party products, such as
CDNOW and Amazon.com
 Internet increases price competition for commodity
items and reduces profitability for retailers selling
undifferentiated items.
 Only 25% of direct-to-customer Internet only
businesses return a profit
 The higher rate of direct-to-customer firms overall
that make a profit (40%) reflects the result of placebased firms launching Internet businesses
Dot coms
Catalogers that
have moved
online
Brick and mortar
Acquisition cost
$82
$11
$31
Cost of marketing
as a percentage of
revenue
119
6
36
Abandoned
shopping carts (in
percent)
52
66
76
The dot coms must invest heavily to create a new brand, while
catalogers and brick and mortar operators can simply migrate
their brand to space 9953421471
Direct-to-customer e-business
model schematic
Legend for e-business Model
Schematic
The organization whose business model is illustrated by the schemati
The organization or individual from which the firm of interest obtain
Goods, services or information. There is generally a flow of money fro
firm of interest to its suppliers.
Who consumes the firm of interest’s goods, services, or information .
There is generally a flow of money from customer to firm of interest.
Legend for e-business Model
Schematic
An organization whose products help to enhance the demand for the
firm of interest’s product
A digital connection through which messages flow in both directions
This connection is the internet.
The firm with the greatest potential to own the customer relationship.
Owning the customer relationship provides the firm with the
opportunity to know the largest amount of useful knowledge about
The customer.
Legend for e-business Model
Schematic
This one direction flow indicates payment from one party to another
In exchange for goods, services or information.
This one direction flow indicates transfer of goods or digital produc
from one party to another
Messages flow through all electronic relationships, therefore
only
those flows of information that are not digital products are
represented by this icon. This information is often the result of
research about a product or service and usually free.
Direct-to-customer
 The firm of interest owns the customer relationship.
 The customer relationship enables the firm to collect
data to profile the customer, who can be encouraged to
become repeat customer.
 Owns customer data – has the potential to develop
powerful insight into customers’ needs and desires.
 Owns transactions – receives a fee or profit margin for
the item sold.
Direct-to-customer
 Channel conflict
 Compaq Australia – Harvey Norman Chain stopped
stocking the brand.
 Had other resellers
 Margins gained from direct sales
 Direct-to-customer model contains risk as well as
opportunity
Direct-to-customer disasters
 Boo.com – an online only retailer of fashion and sports
wear.
 Was undone by its own technical ambitions and the
unrealistic expectations created among its prospective
customers.
 Other retailers have been undone by a
misunderstanding or misapplication of the Direct-tocustomer business model
 Failure to adapt the model as time changes
CDNOW Case Study
 One of the poster children of direct selling on the Internet
 Article - “ CDNOW is one of the pioneers who never
crashed or burned. They did it right. They offer the music,
the diversity of interests, and best of all they keep it simple.
Drawing on their humble beginnings in the early days of
August 1994, they have built online market force. They have
become a brand name”
 From its initial public offering price of $16 in early 1998 –
despite having lost nearly $11 million on sales of $17
millions the year before – CDNOW’s shares reached a high
of $39.25 before falling back to $20.
 Higher customer acquisition ($45) to attract each customer
was given as one of the reason.
CDNOW Case Study
 The site offers more than 500,000 CDs and other music
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related products and 650,000 sound samples, as well as
daily news, features, guides to music genres, and exclusive
interviews and reviews by CDNOW’s editorial staff.
Revenue – direct sales, selling advertisings
Paid Yahoo for placements on their site.
CDNOW merged with competitor N2K in 1999 and in the
same year it announced a merger with Columbia House ,
the music club jointly owned by Sony and Time Warner.
The merger fell through in 2000 but agreed to commit $51
million to prop up CDNOW.
Only one month later company’s situation appeared dire
CDNOW Case Study
 According to company auditors – “Company has suffered
recurring losses from operations, and has a working capital
deficiency and significant payment due in 2000 related to
marketing agreements that raises substantial doubt about its
ability to continue as growing concern”
 What went wrong?
 Competition
 Technical challenge
 And, an unclear , undifferentiated category 4 direct-to-customer e-
business model
 Amazon entered into CD’s and became the largest online sellers
of CDs
 Technologically CDNOW was challenged by the rise of MP3
CDNOW Case Study
 The direct-to-customer e-business model used by CDNOW may
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have been right for 1994 but it was outdated by 2000.
CDNOW had nothing other than CD to sell
Plenty of traffic but not enough profit from sales, and inadequate
revenue from other sources.
CDNOW illustrates the dilemma faced by category 4 direct-tocustomer e-business model selling commodity products.
Without a large market share or the ability to cross sell a wide
variety of products, the value proposition is relatively weak.
Consequently, profitability is elusive with customer acquisition
rate high relative to the small average sale per customer.
Logistic Challenge
 Major challenge – getting the right product to the right
address reliably and economically.
 Non-delivery and wrong delivery : biggest single source
of complaints in e-business.
 Two shipping approaches are available to direct-to-
customer firms:
 Invest
 outsource
Invest
 Firms are building extensive networks of distribution
centers and delivery mechanisms.
 Significant investment and management attention
 Amazon
 200 customer service representatives “put things right”
Outsource
 Many service providers offer full service logistics
support
 Federal express
 fedEx marketplace : one click access to several top online
merchants
 Fast and efficient transaction processing, fulfillment,
and payment
 Critical success factors or core competency ?
Channel Management
 Does the firm directly serve customers in both place
and space (2 & 3) or in space only (1 & 4)?
 2 & 3 – internet as another channel
 Reduced cost or with greater customer intimacy
 Channel conflict – could be severe enough to make a
manufacturer rethink its online strategy
 Levi Strauss & Co. abandoned its e-commerce site
 Channel conflict – can be managed
 Estee Lauder : skincare and cosmetics company
INFRASTRUCTURE
 Application infrastructure
 Communications
 IT Management
INFRASTRUCTURE
 Payment transaction processing to process online
customer payments
 ERP to process customer transactions
 Workflow infrastructure to optimize business process
performance
 Communication network services linking all points in
the enterprise to each other and the outside world,
often using the TCP/IP protocol
INFRASTRUCTURE
 The installation and maintenance of workstations and
local area networks supporting the large number of
people required to operate a direct-to-customer
model;
 Service-level agreements between business and the IT
group or outsourcer to ensure, monitor, and improve
the system necessary for the model
Strategic Objective and Value
proposition
 Traditional retail – buy, move and sell
 E-business direct-to-customer model – sell, buy and
move
 Firm of interest :
 Higher margins
 Expanded markets
 Greater information about customers
 Customer
 Greater choice
 Increased convenience
 Lower costs
Strategic Objective and Value
proposition
 One of the most profitable of the models, as the firm
own all of the three customer assets:
 Relationship
 Data
 Transaction
 The model is potentially profitable particularly for
companies holding large market shares and offering a
clearly differentiated value proposition
 Dell, Realnetworks …
 Other categories of 1 & 2 firms
Strategic Objective and Value
proposition
 For the firms following a less differentiated models
(firms 3 & 4) profits will be hard to achieve as internet
facilitates
 Easy comparison on objective measures such as price
 Therefore, only a small number of category 3 & 4 firms
will thrive and capture large market share
Sources of Revenue
 Direct sales to customer
 Supplemental revenues –
 Advertising
 Sale of customer information
 Product placement fees
 Higher margins may also be attained –
 Reducing the cost to serve the customer directly
 Cutting steps out of the distribution chain
Sources of Revenue
 RealNetworks’s approximate breakdown of revenue
sources :
 Consumer media players (40%)
 Streaming software for business customers (30%)
 Content delivery (20%)
 Advertising (10%)
Critical Success Factors
 Create and maintain customer awareness, in order to
build a critical mass of users to cover the fixed cost of
building an electronic presence
 Reduce customer acquisition costs
 Strive to own the customer relationship and
understand individual customer needs
 Increase repeat purchases and average transaction size
Critical Success Factors
 Provide fast and efficient transaction processing,
fulfillment, and payment
 Ensure adequate security for the organization and its
customers
 Provide interfaces that combine ease of use with
richness of experience, integrating multiple channels
Core Competencies
 Forming and managing strategic partnerships with
suppliers, payment processors, fulfillment houses, and
others in the supply chain.
 Using the ownership of the customer information
assets to understand customer needs, thereby
increasing revenues and margins
 Marketing, prospecting, and selling electronically
using banner advertisements, emails, affiliate
programs, and click throughs from allies.
 Creating unique content to reduce price competition
on commodities
Full – Service Provider
 Full – Service Provider E-Business model schematic
 B2C & B2B Full – Service Providers
 INFRASTRUCTURE
 Channel and Segments
 Case Study GE Supply Company
 Strategic Objective and Value Proposition
 Sources of Revenue
 Critical Success Factors
 Core Competencies
Full – Service Provider
 Model combines the strength of both the direct-to-
customer and the intermediary models.
 A firm using the Full – Service Provider model
provides total coverage of customer needs in a
particular domain consolidated via a single point of
contact.
 Sourced internally or externally
 Domain : financial services, health care, or industrial
chemicals
Full – Service Provider
 Prudential Advisor, established by Prudential
Securities, a subsidiary of the Prudential Insurance
Company of America.
 Prudential Advisor is redefining the full service
relationship and bringing together a wealth of
resources to support educated investment decisions.
 Allows customer to interact in person or by telephone
with a live financial adviser.
 A flat fee for trade, and an annual fee
 Prudential Advisor allows Prudential Securities to
 own the customer relationship,
 the data about what the customers are doing with
regards to investment
 Some of the transactions
 Helps Prudential to cross sell
 Third party does not own the customer relationship