We will discuss the components of an Internet business model &
the linkages between its componen ts
CHAPTER 4 COMPONENTS & LINKAGES BUSINESS MODEL PROFIT SITE PRICE SCOPE CUSTOMER VALUE REVENUE SOURCE CAPABILITIES IMPLEMENTATION CONNECTED ACTIVITIES SUSTAINABILITY COST STRUCTURE 1.DIFFERENTIATION 2.LOW COST 1.MARKET SHARE 2.GROWTH 3.TYPES OF PRICING MENU ONE-TO-ONE AUCTION REVERSE AUCTION BARTER PRODUCT FEATURES TIMING LOCATIONS SERVICE PRODUCT MIX REPUTATION 1.ACTIVITIES TO PERFORM 2.WHEN TO PERFORM 1.STRUCTURE,SYSTEMS PEOPLE 1.BLOCK STRATEGY 2.RUN STRATEGY 3.TEAM-UP STRATEGY 1.RESOURCES 2.COMPETENCIES 3.COMPETITIVE ADVANTAGE
COMPONENTS & LINKAGES
Rationale for Components
To make money ,a firm must offer its customers something the customers value & the competitors cannot offer
Must find ways to retain its competitive advantage
BUSINESS MODEL COMPONENTS
It’s a location in a value configuration
Determines the competitive pressures from rivals, suppliers, customers, potential new entrants, complementors & substitutes
Attractive or useful if demands used by competitive forces is low
Chapter 2. pg 19 table 2.1
3. Brokers agents
5. Service provider
Customers buy product from a firm only if the product offers them something that competitor’s products do not.
Low cost products/services
Differentiation = customers think “ it has something of a value that other products don’t have” .
* 7 different ways can differentiate a product:
Linkage between functions /Linkage with other firm
Offer features that competitor’s products do not have
E.g. emphasize the speed of a chip for a microprocessor manufacturer
Customization of an internet website
Localization of services & product offers
Be the first to introduce the product
Products with identical features can still be differentiated by virtue of their location
E.g. ease of access to the product
ISP example Michigan VS New York
Service of both are different
How fast is the response of a product be attained by its sellers
E.g. after sales service of a certain product after it is broken
5. Product Mix
One stop shopping for variety of goods are convenient for customers
E.g. Amazon. COM=16million items for sell
Use data to personalized their presentation of the store
Association with another firm
Larger web community
7.Brand name Reputation
Branding is always a winner
Internet offers a no other channel to established brand name reputations
Branding can be world wide, internet reaches more people
2. Low cost products/services
Firm’s product & services cost customers less than those of its competitors
Cost less for the firm to offer the customers of the product & services-the cost saving were passed on to the customers
Sell on the internet saves operating cost, distribution cost & transportation cost
Better coordination of activities = lower cost for producers
BUSINESS MODEL COMPONENTS
Market segments or geographic areas to which the value should be offered
How much of the needs of the segment that it can make profit
E.g. a firm must decide how much demand of its teens segment needed that the firm needs to fulfill
Universality of the internet breaks the scope barrier.
Price your value properly/accurately to gain profit
Must have pricing strategy to avoid killing a product
We are in a “knowledge based economy”
Our product must provide complete information before entering the market
( Price e.g.) * To illustrate basis of pricing strategies for “knowledge based” products & services: p.g 58 text book.
PROFITS = ( P - V ) Q – F
P price per Unit of the Product
V price per Unit Variable Cost
Q total number unit sold
F fixed cost
C C C C
* To illustrate basis of pricing strategies for “knowledge based ” products & services: p.g 58 text book . FIRM A FRIM B R & D (Fixed Cost) $500 million $500 million Variable Cost $5 $5 Price per Unit $200 $200 Market Share 80% Market Share 20% Knowledge based - software – IT - content
Market Share & margin are important!!
Firm with more market share make more profit for that year
Controlling of market share , involves in the early of introducing the product example
Giving away product C but charging product D
Pricing low to penetrate the market
Example: Netscape Giving away for free the browser Netscape, but charging corporate customers for its servers Example: Most software companies Sells cheap software
Growth are Revenues
Develop the market
Sell more units, you will increase the market
Types of Pricing & the Influence of the Internet
MENU: Fixed pricing, seller sets price buyer buys it or leave it
ONE-TO-ONE: seller negotiates which price both accepts-
AUCTION: seller solicits bids from many buyer& sells to the highest bidder
RESERVE AUCTION: seller decides order of potential buyer
BARTER: swapping of goods for goods
Revenue sources: from products sold
Critical part in business model analysis
E.g. online stockbrokerage firm gain revenue sources from 3 areas:
Interest charge to clients
Spread of bid & ask price of stock
To offer outstanding products & charge premium price to the customers, a firm must perform connected activities for the basis of producing the product
Choose which activity to perform & when to perform it
Which activity to perform
The activities should be consistent with the value that the firm offering
Take advantage of industry success drivers
Consistent with any capabilities that firm wants to build
Make industry more attractive for the firm
When to perform activities
What are the characteristics of the industry at that stage of the life cycle & what will they be down the line
What are existing competitors doing & what are potential ones likely do
Are the activities consistence?
Means ‘ carrying out’/executing/performing the decision
The role of implementation, the relationship between
1.structure 2.systems 3.people
Who is supposed to report to whom & who is responsible for what so that the task in that organization are carried out
People are grouped &
perform their task
according to traditional
Enable to learn from each
People are organized not
by functional area
How to keep people motivated as they carried out their task & responsibilities
Money, recognition, ideas, seeing as a person…does all this matter.
The ‘F$%&’ you attitude ect.
UMS corporate culture?
Assets under financial statement Tangible - plants, equipment, cash reserves, PC, servers Intangible - patents, copyrights, reputation, brands, programmers. Ability of firm to turn its resources to a customer values & profits. Integration of more than one resources.e.g. APPLE experience. Core competencies: firm able to offer better value than other competitors . Advantage to the firm. Honda offers outstanding engines.
The ability of the firm to sustain its competitive advantage from its competitor.
How the firm uses its resources & strategies to stop competitors from gaining market share.
Uses 3 strategies:
Sustainability strategies BLOCK STRATEGY -Firm puts barriers around its product market space. -Uses Intellectual properties rights. -This strategy works only if, company has unique capabilities - Easier in the internet era uses reverse engineering. RUN STRATEGY -Thinks that blocking strategy fails. therefore, this strategy must change some of its components & linkages /b-model or maybe sometimes create a new business model to offer customer better value. -Gives first mover advantage -Example DELL TEAM-UP STRATEGY -If you can’t beat em’. Join em’ -nothing else works. -thro’ strategic alliances, joint venture acquisition, equity position. -allows sharing of resources it does have. - promotes knowledge transfer -creates ‘win-win situation’
All process of executing business plan cost money.
Cost structure expresses the relationship between its revenues & the underlying cost of generating those revenues
To keep cost low firm must first determine its cost/identify its cost.