0
4-1
4-2
Chapter 4
Business
Models
McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
4-3
Chapter 4: Business ModelsChapter 4: Business Models
• Questions answered in this chapter:
– What are the four compone...
4-4
Value ClusterValue Cluster
Online OfferingOnline Offering
Resource SystemResource System
Financial ModelFinancial Mode...
4-5
Value Propositions and Value ClustersValue Propositions and Value Clusters
• Value Proposition-requires management to ...
4-6
Value Propositions and Value ClustersValue Propositions and Value Clusters (cont’d)(cont’d)
• Choice of Segments
– Mar...
4-7
Quality of a Value Proposition or ClusterQuality of a Value Proposition or Cluster
• Customer Criteria.
– Do target cu...
4-8
Quality of a Value Proposition or ClusterQuality of a Value Proposition or Cluster
• Company Criteria.
– Will the orga...
4-9
Quality of a Value Proposition or ClusterQuality of a Value Proposition or Cluster
• Competitive Criteria.
– Are other...
4-10
The Online OfferingThe Online Offering
• Scope of the Offering
– Category-Specific Dominance-Companies that
focus exc...
4-11Exhibit 4-2: Customer DecisionExhibit 4-2: Customer Decision
Process — Flower ExampleProcess — Flower Example
Disposal...
4-12
Exhibit 4-3: Egg Diagram for 1-800-Flowers.comExhibit 4-3: Egg Diagram for 1-800-Flowers.com
Flower / Gift Decision P...
4-13
• Modifications to the activity system logic
for the online marketplace
– Shift from physical world to virtual and
ba...
4-14
• Step 1: Identify core benefits in the
value cluster
• Step 2: Identify resources that relate to
each benefit
• Step...
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Online Gift
Center
Online Gift
Center
Integrated
Partner Offers
Integrated
Partner Offers
Broad
Assortmen
t of Gifts
...
4-16
• Uniqueness of the system
• Links between resources and benefits
• Links among resources in the system
• Links among...
4-17Exhibit 4-5 : Online/Offline Egg DiagramExhibit 4-5 : Online/Offline Egg Diagram
for 1-800-flowers.comfor 1-800-flower...
4-18
• Portal agreements (AOL, Yahoo, MSN,
etc.)
• Anchor tenant agreements (exclusive
partnerships)
• Promotion agreement...
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Revenue ModelsRevenue Models
• Advertising- Earning revenue through the selling of
ads (banner or interstitial), site...
4-20
Online Business ModelsOnline Business Models
• Metamarket Switchboard Model
• Traditional and Reverse Auction Models
...
4-21Exhibit 4-6: SummaryExhibit 4-6: Summary
of Online Business Modelsof Online Business Models
Business
Models
Metamarket...
4-22
• Value Cluster
– Target segments (savvy investors,
“seekers”, “dabblers”)
– Key benefits (up-to-the-minute informati...
4-23
Marketwatch.com Business ModelMarketwatch.com Business Model (cont’d)(cont’d)
• Supportive Rationale
– Experienced ed...
4-24
Exhibit 4-7: MarketWatch.com Egg DiagramExhibit 4-7: MarketWatch.com Egg Diagram
Learn
 Getting Started
 Investor’s...
4-25
• Resource System
– CBS News
– Financial Times
– Marketwatch.com
– BigCharts.com
– Content partners (Hoovers, Zacks,
...
4-26Exhibit 4-8: MarketWatch.comExhibit 4-8: MarketWatch.com
Resource SystemResource System
=Core Benefits =Resources
Cred...
4-27
• Revenue model
– Advertising revenue (37% in 2001)
– Licensing revenue (52% in 2001)
– Other revenue, subscription, ...
4-28
Exhibit 4-9: Partners Give / Get MatrixExhibit 4-9: Partners Give / Get Matrix
Partners
Benefits to Partner:
“Give”
B...
4-29Exhibit 4-10: MarketWatch.com’sExhibit 4-10: MarketWatch.com’s
Revenue DistributionRevenue Distribution
18.03
34.95
17...
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  1. 1. 4-1
  2. 2. 4-2 Chapter 4 Business Models McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
  3. 3. 4-3 Chapter 4: Business ModelsChapter 4: Business Models • Questions answered in this chapter: – What are the four components of an online business model? – Do firms compete on value propositions or value clusters? – What are the approaches to developing an online offering, whether the business is providing a product, service, or information? – What is a successful, unique resource system? What are the characteristics of good resource systems? – What are the revenue sources available to firms?
  4. 4. 4-4 Value ClusterValue Cluster Online OfferingOnline Offering Resource SystemResource System Financial ModelFinancial Model Exhibit 4-1: ComponentsExhibit 4-1: Components of a Business Modelof a Business Model
  5. 5. 4-5 Value Propositions and Value ClustersValue Propositions and Value Clusters • Value Proposition-requires management to specify three things: – Target segment – Focal customer benefits – Key resource that give market advantage • Value Cluster- value proposition consisting of a cluster of composed of three parts: – Choice of target customer segments – Particular focal combination of customer-driven benefits – Rationale for why this firm and its partners can deliver the value cluster in a significantly better way than competitors
  6. 6. 4-6 Value Propositions and Value ClustersValue Propositions and Value Clusters (cont’d)(cont’d) • Choice of Segments – Market size and growth rates – Unmet or insufficiently met customer needs – Weak or nonexistent competitors • Choice of Focal Customer Benefits – Single-benefit approach – Multiple-benefit approach • Choice of Unique and Differentiating Capabilities – Tangible assets – Intangible assets – Capabilities of the organization
  7. 7. 4-7 Quality of a Value Proposition or ClusterQuality of a Value Proposition or Cluster • Customer Criteria. – Do target customers understand the proposition or cluster? – Is it relevant to their needs? – Is it believable? – Is it perceived as unique or indistinguishable from other propositions or clusters? – Will it provoke action on the part of the target customer?
  8. 8. 4-8 Quality of a Value Proposition or ClusterQuality of a Value Proposition or Cluster • Company Criteria. – Will the organization “rally around” the proposition or cluster? – Does the company have the resources or capabilities to own this cluster? – Will it block or facilitate the eventual move to additional vertical markets?
  9. 9. 4-9 Quality of a Value Proposition or ClusterQuality of a Value Proposition or Cluster • Competitive Criteria. – Are other competitors trying to hold a similar proposition or cluster? – Can current or future competitors match this cluster? – How easy is it for future competitors to match this cluster?
  10. 10. 4-10 The Online OfferingThe Online Offering • Scope of the Offering – Category-Specific Dominance-Companies that focus exclusively on one product category, such as flowers. – Cross-Category Dominance- The extension of product offerings from a single category to additional product categories, such as Amazon.com.
  11. 11. 4-11Exhibit 4-2: Customer DecisionExhibit 4-2: Customer Decision Process — Flower ExampleProcess — Flower Example DisposalDisposal LoyaltyLoyalty SatisfactionSatisfaction Purchase DecisionPurchase Decision Evaluation of AlternativesEvaluation of Alternatives Information SearchInformation Search Problem RecognitionProblem Recognition PREPURCHASE PURCHASE POSTPURCHASE
  12. 12. 4-12 Exhibit 4-3: Egg Diagram for 1-800-Flowers.comExhibit 4-3: Egg Diagram for 1-800-Flowers.com Flower / Gift Decision Process Need Recognition Search for Ideas and Offerings Purchase Decision Message Selection Post-Sales Support and Perks Education on Flowers and Decoration  Gift reminder service  Holiday specials  Everyday celebration suggestions  Special occasion suggestions  Birthday Gift Central  Gift by occasion  Gift by price  Monthly gift clubs  Corporate gift services Ideas and Information Post-Sales Support  Product price  Product picture  Product description  Delivery information  Delivery availability  Physical cards in gifts  E-mail a bouquet  Order receipt e-mail  Q&A chat  FAQ  Customer service inquiry form Perks  Miles earned with flower purchases  Free gifts  Discounts at AOL & BN.com with flower purchases  Member specials  “Care and handling”  “Do it yourself”  Special events and educational workshops held at stores  Floral ideas  Garden ideas  Home ideas  Gift ideas  Gourmet ideas  Store locator  Recommendations by budget  Bestsellers Evaluation of Alternatives Gift Recommendations  Shopping basket  E-commerce transaction  Special shopping features – Delivery outside U.S. – 1-800-lasfloras.com Product Offering Source: Adapted from Mohanbir Sawhney, “Making New Markets,” Business 2.0 (May 1999): 116–21.
  13. 13. 4-13 • Modifications to the activity system logic for the online marketplace – Shift from physical world to virtual and back to physical world – Shift from a supply-side focus to a demand-side focus – Shift from resources to benefits – Shift from single to multifirm systems What Is a Successful Resource System?What Is a Successful Resource System?
  14. 14. 4-14 • Step 1: Identify core benefits in the value cluster • Step 2: Identify resources that relate to each benefit • Step 3: Identify to what degree the firm can deliver each benefit • Step 4: Identify partners who can complete resources Specifying a Resource SystemSpecifying a Resource System
  15. 15. 4-15 Online Gift Center Online Gift Center Integrated Partner Offers Integrated Partner Offers Broad Assortmen t of Gifts Broad Assortmen t of Gifts Customer Service Customer Service Wide Reach to Customers Wide Reach to Customers Widesprea d Easy Access Widesprea d Easy Access Multiple Contact Points Multiple Contact Points Popular Website Popular Website High Quality of Flowers High Quality of Flowers TechnologyTechnology Strong Brand Name Strong Brand Name Strong Distribution Network Strong Distribution Network =Resources = Core Benefits Core Benefits Exhibit 4-4: 1-800-Flowers.com Resource SystemExhibit 4-4: 1-800-Flowers.com Resource System
  16. 16. 4-16 • Uniqueness of the system • Links between resources and benefits • Links among resources in the system • Links among resources • Links between virtual world and physical world business systems • Sustainable advantage Criteria to Assess theCriteria to Assess the Quality of a Resource SystemQuality of a Resource System
  17. 17. 4-17Exhibit 4-5 : Online/Offline Egg DiagramExhibit 4-5 : Online/Offline Egg Diagram for 1-800-flowers.comfor 1-800-flowers.com Off-line Product Offering  Special events and educational workshops held at stores  Prompts on toll free number recording  Suggestions from CSRs* in stores and via phone Prompts on toll free number recording Suggestions from CSRs* in stores and via phone Brochure  Suggestions from CSRs in stores via phone  Brochure  Information from CSRs in store and via phone  Brochure  Purchase in-store  Purchase via phone  In-store specials  Specials offered via phone *CSR = Customer service representative Flower / Gift Decision Process Need Recognition Search For Ideas and Offerings Purchase Decision Message Selection Post Sales Support and Perks Education on Flowers and Decoration  Gift reminder service  Holiday specials  Everyday celebrations suggestions  Special occasion suggestions  Gift guru  Favorite gifts  Gift frequency  Gift impossible  Gift baskets  Corporate gift services Ideas and Information Post-Sales Support  Product price  Product picture  Product description  Delivery information  Delivery availability  Gizmo fully-animated greeting cards  Physical cards in gifts  Order receipt email  eQ&A online customer service  FAQ  Customer service inquiry form Perks  Miles earned with flower purchases  Free gifts  Discounts at AOL & BN with flower purchases  Member specials  “Care and handling”  “Do it yourself”  Floral ideas  Garden ideas  Home ideas  Gift ideas  Gourmet ideas  Store locator  Recommendations by budget  Best sellers Evaluation of Alternatives Gift Recommendations  Shopping basket  E commerce transaction  Special shopping features – Delivery outside U.S. – 1-800-lasfloras.com On-line Product Offering  In-store customer service  Customer servifce on toll- free number  Select card in-store  Select card via phone
  18. 18. 4-18 • Portal agreements (AOL, Yahoo, MSN, etc.) • Anchor tenant agreements (exclusive partnerships) • Promotion agreements (cross industry promotions such as frequent-flier miles, telephone discount rates, gift certificates, etc.) The Role of PartnershipsThe Role of Partnerships
  19. 19. 4-19 Revenue ModelsRevenue Models • Advertising- Earning revenue through the selling of ads (banner or interstitial), site sponsorships, event underwriting, or other forms of communication • Product, Service, or Information Sales- Income generated from the sale of goods on the site • Transaction- Revenue accrued from charging a fee or taking a portion of the transaction sum • Subscription- Revenue generated through subscriber fees for magazines, newspapers, or other information/service businesses • License Fees- Revenue generated from licensing of content
  20. 20. 4-20 Online Business ModelsOnline Business Models • Metamarket Switchboard Model • Traditional and Reverse Auction Models • Freshest-Information Model • Highest-Quality Model • Widest-Assortment Model • Lowest-Price Model • Most-Personalized Model
  21. 21. 4-21Exhibit 4-6: SummaryExhibit 4-6: Summary of Online Business Modelsof Online Business Models Business Models Metamarkets Switchboard Auction Freshest Information Highest Quality Widest Assortment Lowest Prices Most Personalized Core Benefits and Proposition • Single point of access for all needs • Depth and breadth of product as- sortment • Number of ac- tive buyers • Timely and ac- curate informa- tion • High-quality products with exclusivity •Broadest in- ventory possi- ble •Can lead to best prices • Lowest prices • Unique prod- uct, service, or experience Online Offering • Either cate- gory specific of access categories • Usually a large number of products • Broad or tar- geted audi- ence • Concentrates on smaller offerings for smaller mar- kets •Can be either category killer in one category or widest as- sortment across man categories • Niche cate- gory or across wide variety of categories • Geared toward a single buyer Key Resources • Large, active customer base • Commitment to building • Large base of buyers and sellers • Good, reliable technology • Strong brand name • Hiring best personnel • Ability to source products • Outstanding customer ser- vice • Strong brand •Significant brand name •Strong logistics to manage brand name • Ability to build strong back- office systems and leverage scale econo- mies • Ability to generate ex- ceptional cus- tomer knowl- edge Revenue Model • Transaction fees • Product sales • Advertising • Affiliate deals • Transaction fees • Product and service sales • Subscription • Advertising • Product, service, and information sales • Advertising • Product sales • Product sales • Product sales • Subscriptions Examples • BabyCen- ter.com • Verticalnet • CarPoint.com • Fashion- Mall.com • eBay • Amazon Auc- tions • Covisint • NYTimes.com • Salon.com • Business 2.0 • Zagat.com • FAO.com • Ashford.com • Amazon.com • CDNow • Sephora.com • EBags.com • Lowest- fare.com • Allbooksfor- less.com • Outpost.com • Reflect.com • Sevency- cles.com • eDiets.com
  22. 22. 4-22 • Value Cluster – Target segments (savvy investors, “seekers”, “dabblers”) – Key benefits (up-to-the-minute information; original, in-depth analysis; personal- finance tools; multiple points of access) – Supportive rationale (experienced editorial staff, multiple forms of media, CBS News and Financial Times brand names) Marketwatch.com Business ModelMarketwatch.com Business Model
  23. 23. 4-23 Marketwatch.com Business ModelMarketwatch.com Business Model (cont’d)(cont’d) • Supportive Rationale – Experienced editorial staff with financial expertise – Infrastructure allowing access from multiple forms of media – Credibility through its association with CBS News
  24. 24. 4-24 Exhibit 4-7: MarketWatch.com Egg DiagramExhibit 4-7: MarketWatch.com Egg Diagram Learn  Getting Started  Investor’s Primer  IPO Basics  Financial Term Glossary Invest Sponsorships by Online Brokerages  Datek Online  Fidelity Investments  National Discount Brokers  Ameritrade  Cybertrader  Scottrade Broker Decision Center Planning Tools  Sharebuilder  Payment Calculator  Home Price Check  Best Credit Card Rates  Insurance QuickQuote Third-Party Sources  Market Guide  Hoover’s Online  Multex  Annual Reports Club  INVESTools  Over 250,000 Investment Research Reports Community  Private e-mail  People Watch  Hot Discussions  Occasional Polls US Markets  Market Monitor  Major Indexes  Dollar Volume Leaders Commentary  Thom Calandra’s Stockwatch  Bambi Francisco’s Net Sense  Bezderick on Bonds  (Many other commentary columns)  eNewsletters Online  News Watch  E-mail Alerts  Real-time Headlines  Hotstock Tracker  Marketwatch Live  eSignal Radio  Contribution to Westwood One Global Markets  Key Rate Snapshot  International Indexes  Non-Us Stocks Track Investments  Portfolio View  Portfolio Analyzer  Portfolio Allocation  Portfolio Tracker Breaking News Market Figures Personal Finance Process Learn About Personal Finance Plan Investment Strategy Stay Updated on the Latest News and Figures Develop Insight Invest Track Investments Television  CBS MarketWatch Weekend  Contributions To: – CBS Early Show – CBS Evening News – CBS NewsPath Develop Insight Futures and Options  Futures Contracts  After-Hours Futures Bonds  Bellwether Bonds Report Funds  Fund Profile  Fund Charts Stocks  Interactive Charting  Historical Charts
  25. 25. 4-25 • Resource System – CBS News – Financial Times – Marketwatch.com – BigCharts.com – Content partners (Hoovers, Zacks, INVESTools, etc.) – Distribution partners (Yahoo, AOL, Quicken, etc.) Marketwatch.com Business ModelMarketwatch.com Business Model (cont’d)(cont’d)
  26. 26. 4-26Exhibit 4-8: MarketWatch.comExhibit 4-8: MarketWatch.com Resource SystemResource System =Core Benefits =Resources Credible Analysis and Personal Finance Tools Up-to-the- Minute Information Multiple Points of Access Distribution Partnerships Distribution Partnerships Association with CBS Association with CBS Experienced Editorial Staff Experienced Editorial Staff Partnerships with Content Providers Partnerships with Content Providers Available Infrastructure Available Infrastructure International Presence International Presence CORE BENEFITS
  27. 27. 4-27 • Revenue model – Advertising revenue (37% in 2001) – Licensing revenue (52% in 2001) – Other revenue, subscription, etc. (6% in 2001) • Value model (best information) • Growth model – Advanced portfolio-tracking tools – International markets – Services to address expanded trading hours – Expand reach to wireless devices – Expand TV and radio shows to more stations Marketwatch.com Business ModelMarketwatch.com Business Model (cont’d)(cont’d)
  28. 28. 4-28 Exhibit 4-9: Partners Give / Get MatrixExhibit 4-9: Partners Give / Get Matrix Partners Benefits to Partner: “Give” Benefits to MarketWatch.com: “Get” CBS News  Experienced editorial staff  24/7 international coverage of financial markets  Real-time financial news  34 percent ownership of MarketWatch.com  Credibility of CBS brand name  Access to CBS facilities  Access to CBS audience of 6.6 million homes  $30 million of rate-card promotion and advertising on CBS channels Content Partners (e.g., Hoovers, Zacks, INVESTools)  Access to MarketWatch.com audience  High-quality analysis of financial news  Portion of revenue generated from sales of partner products Distribution Partners (e.g., Yahoo, AOL, Quicken)  Users get access to MarketWatch.com content and tools  Advertising and click-through fees collected  Increase in audience reach  Increase in brand recognition
  29. 29. 4-29Exhibit 4-10: MarketWatch.com’sExhibit 4-10: MarketWatch.com’s Revenue DistributionRevenue Distribution 18.03 34.95 17.98 5.26 15.81 24.77 1.64 3.15 3.09 0 5 10 15 20 25 30 35 40 1999 2000 2001 Advertising Licensing Other
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