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2011 autumn e business 1


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Seminar for Masters students at HSE

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2011 autumn e business 1

  1. 1. Higher School of Economics , Moscow 2011 Ian Miles Research Laboratory for the Economics of Innovation, HSE (and Manchester Institute of Innovation Research) November 2011 e - Business and e - Business Models – Part 1 [ « Business and business models in the Internet »]
  2. 2. <ul><li>Framing the topic: what is e-Business? </li></ul><ul><li>A historical perspective </li></ul><ul><li>Business Models and Plans </li></ul><ul><li>e-Business Models </li></ul><ul><li>e-Business Activities (Services) and Models </li></ul><ul><li>Finance and Revenue </li></ul><ul><li>Launch and Growth </li></ul>Higher School of Economics, November 2011 Outline – 4 sets of lectures
  3. 3. eBusiness <ul><li>Business Processes mediated and augmented by new Information Technology </li></ul><ul><li>Using microelectronics and related technologies in computers, networks, and the like </li></ul><ul><li>To capture, store, distribute, communicate, visualise, process digital data of all kinds </li></ul><ul><li>Within and among organisations. </li></ul>
  4. 4. eBusiness Models are very diverse! <ul><li>Retail </li></ul><ul><ul><li>Physical products </li></ul></ul><ul><ul><li>Service products </li></ul></ul><ul><li>Information content </li></ul><ul><ul><li>Experience </li></ul></ul><ul><ul><li>Intelligence </li></ul></ul><ul><li>Networking </li></ul><ul><li>Transactions </li></ul><ul><li>Processing </li></ul><ul><li>And many more… </li></ul><ul><ul><li>Some commentators describe dozens of models! Vary in terms of offering , market (B2B, B2C, P2P…) and income source </li></ul></ul>
  5. 5. Today <ul><li>Historical Perspectives: e-Business before the Web </li></ul><ul><li>The Shock of the New (Economy) and the rise of Business Model analysis </li></ul><ul><li>Business Models versus Business Plans </li></ul><ul><li>Elements of a Business Model </li></ul><ul><li>First, then, a little Historical Perspective </li></ul>
  6. 6. Back in the Stone Age <ul><li>G Thomas and I Miles 1989, Telematics in Transition: the emergence of new interactive services, Harlow: Longmans </li></ul><ul><li>Telematics = computers + computing </li></ul><ul><li>Before the Web - Time Berbers-Lee was developing this in 1989 at CERN, and it took several years to take off (first browser was 1993) </li></ul>TELEMATICS IN TRANSITION T he emergence of new interactive services Graham Thomas and Ian Miles Longmans
  7. 7. Now we have many “telematics” services (with many Business Models) Some are runaway successes: MOST ARE NOT
  8. 8. Three Types of Telematic Service INFORMATION TRANSACTION COMMUNICATION Online Databases News, Weather, Timetables “Home and office” banking Shopping, ticketing Electronic mail Bulletin boards, chatlines Before web, browsers. Some were stand-alone, dial-up; some were hosted on a common platform (we discuss videotex later)
  9. 9. Competing with established – and new - services INFORMATION TRANSACTION COMMUNICATION Faster publications CD-ROM, teletext, etc. Telephone banking Telesales (call centres) Fax Pagers There were huge anticipations of take-off; But in many cases this was slow, limited to niches Often other solutions prevailed; many new entrants went bust.
  10. 10. Much disappointment <ul><li>Relatively low levels of computer penetration, even fewer online </li></ul><ul><li>Slow access to networks via telephone lines </li></ul><ul><li>[exceptions in a few industries – niches] </li></ul><ul><li>No common design standards for services – interfaces continually reinvented, much learning required, not user-friendly * </li></ul><ul><li>Innovators faced complex environment – “swarming” of competing IT-based innovations (e.g. fax exploded in 1990s), rapid technological change in hardware and software, need for new combinations of skills, need to address very different sets of stakeholders </li></ul><ul><li>Incumbents often had substantial lock-in of consumers and supply chains. </li></ul><ul><li>How to understand? Useful ideas from David Teece </li></ul>* When the web did appear, many services had to migrate to this model – or die!
  11. 11. Two ideas from David Teece <ul><li> </li></ul><ul><li>Stabilisation of design paradigms </li></ul><ul><li>Complementary assets </li></ul><ul><ul><li>Innovations are rarely unique; first-comers often do not succeed in creating substantial markets; life is tough </li></ul></ul>
  12. 12. Design Paradigm <ul><li>Innovation begins when an idea is commercialised: we can offer this new/better service </li></ul><ul><li>But just what form does this take? </li></ul><ul><li>Often other firms will be trying to offer similar services – or if not, and if your idea is a good one, they soon will. </li></ul><ul><li>Competition at the outset is often about what design will prevail. </li></ul><ul><li>This may come to be seen as the “natural” solution – e.g. car or PC keyboard layout. </li></ul>
  13. 13. Diffusion of innovation <ul><li>Examples: use of mobile phones, ecommerce </li></ul>Typical Model: uptake of an innovation: percentage of market adopting Network effects: more people using compatible systems makes it easier to learn, easier to communicate, share
  14. 14. Stabilisation of paradigm <ul><li>Examples: PC; web pages as standard interface </li></ul>Design flux Dominant Design(s) New models? Product differentiation? Increasing user-friendliness, less need for skill, economies of scale Competition over functionality Competition over efficiency
  15. 15. So who wins? <ul><li>Note necessarily the person with the technically best design! </li></ul><ul><li>Not necessarily the cheapest! </li></ul><ul><li>Who can mobilise Complementary Assets – </li></ul><ul><ul><li>Brands, marketing, distribution channels </li></ul></ul><ul><ul><li>Supply chain connections (e.g. hardware, content providers) </li></ul></ul><ul><ul><li>Intellectual property, intellectual assets </li></ul></ul><ul><ul><li>Links to users, etc. </li></ul></ul>
  16. 16. Sometimes even a major player fails <ul><li>Another story from prehistory: </li></ul><ul><li>“ Web 0.1”launched early ‘80s </li></ul><ul><li>Set-top box, plug into TV and telephone </li></ul><ul><li>Small keyboard </li></ul><ul><li>Simple menus </li></ul><ul><li>Request “pages” of information </li></ul><ul><li>Many (centralised) content providers </li></ul><ul><li>Target markets vast: consumers, offices, businesses: but the millions stayed away (as pilots had warned) </li></ul>Videotex: Prestel from BT
  17. 17. Unless you can mobilise powerful stakeholders Minitel Design Minitel / Teletel: French videotex service. The rare success. Terminal provided free. Design features: Minitel terminal meant TV/phone not tied up. Payment hourly reduced anxiety over charges. Use prompted by withdrawal of phone book Hit critical mass – tens of millions of users by ‘90s (many purchases of superior terminals) Much scope in system to innovate and plug in private services; messagerie and minitel rose very popular, a cultural phenomenon Established a dominant design that may have led to slow French adoption of Web!
  18. 18. Lessons from history? <ul><li>Many conclusions still relevant today. </li></ul><ul><li>Complementary assets are vital, to establish winning formula, or just to survive among big players – this takes us into business model issues. </li></ul><ul><li>Need tactics to survive complex and turbulent environments (they have not got less complex and turbulent!). In 1989 we noted the need to: </li></ul><ul><ul><li>Create or work within design paradigm. </li></ul></ul><ul><ul><li>Determine relevant service packages and bundles. </li></ul></ul><ul><ul><li>Establish trust. </li></ul></ul><ul><ul><li>Enlist users. </li></ul></ul><ul><ul><li>Decide on the target market. </li></ul></ul><ul><ul><li>Encourage loyalty but beware other parties’ lock-in. </li></ul></ul><ul><ul><li>Ensure you have the right mix of skills and capabilities. </li></ul></ul>
  19. 19. <ul><li>The “Telematics in Transition” study, the videotex experience, etc. were in the 1980s. But in the 1990s the web took off, with high uptake of PCs and better internet connections. </li></ul>COMING MORE UP TO DATE - THE DOT.COM BOOM, BUBBLE, BUST Moving On
  20. 20. Higher School of Economics, June 2011 1995 to 2000, accelerating in the latter period; Rapid growth of hopes and hypes about internet businesses Major levels of investment Highly speculative, based on hopes of technology-based future returns from new business models  People began talking about New Business Models – prompting upsurge of debate about Business Models The “Dot Com Bubble” brought business model thinking to the fore
  21. 21. Explosion of analysis Source: Harzing’s Publish or Perish ; analysis of articles and books (Google Scholar, cleaned) with “Business Model” in title 6 June 2011 [Google results – May 2000 – 107k hits; June 2011 - 25.3m hits] 5 8 15 396 208 590 490 466 697 409 Period 5 5 5 5 2 2 2 2 2 1.5 1980-84 1985-90 1990-94 1995-99 2000; -02 -04 -06 -08 -10 -1 -3 -5 -7 -9 -11part
  22. 22. <ul><li>Was a new form of business – e-business, internet business, business2.0 – emerging? </li></ul><ul><li>Did it play by quite different rules? </li></ul><ul><li>What were the rules, anyway? </li></ul><ul><li>As so often, it is “the other” that leads us to reflect on just who and what we are. </li></ul><ul><li>Firms were apparently flourishing – certainly attracting huge investments – without doing any of the things that firms normally do. </li></ul>The “New Economy”
  23. 23. What were the new “models”? <ul><li>Exploit Network externalities (Metcalfe’s Law) </li></ul><ul><li>“ Get Big Fast”: lock in users now, worry about making profits later </li></ul><ul><li>Operate at a loss now to gain and retain market share – often free (and very fancy) service offerings; huge advertising spend </li></ul><ul><li>Cover expenses (sometimes huge - $100ms) with funds invested by venture capital, IPOs, etc. (There was plenty of money around.) </li></ul><ul><li>Get rich quick  feeding frenzy </li></ul><ul><li>Yet many of the ideas were unconvincing, the entrepreneurs untested. </li></ul>Graphic from Wikipedia
  24. 24. The view from Doonesbury Gary Trudeau © Other people saw the humour, too
  25. 25. The Dot Bombs <ul><li>Example: </li></ul><ul><li>Idea: disintermediation - sell pet food and supplies directly to consumers </li></ul><ul><li>Feb 1999-Nov 2000 </li></ul><ul><li>IPO raised $82.5m; over $300m investment </li></ul><ul><li>Huge advertising spend ($12m in 1999 – revenue<$1m, break-even expected at $300m) </li></ul><ul><li>-> brand recognition </li></ul><ul><li>But no market research supporting idea of demand </li></ul><ul><li>Selling at a loss to capture market </li></ul><ul><li>Investment in warehouses </li></ul><ul><li>Bubble burst meant no-one would continue to pour money in. </li></ul>
  26. 26. Inevitable crash (Almost) everyone hurt – including suppliers (e.g. network and server firms), public bodies (e.g. cities building internet hubs), and small investors. Already there were many warning voices, and several “false stops”
  27. 27. One interpretation
  28. 28. A more general lesson? Gartner’s Trajectory of Hype Technology Trigger Peak of Inflated .. Expectations Trough of Disillusionment Source: Gartner Group , who regularly update with various technologies: it may not be scientific, but it captures a familiar dynamic Plateau of Productivity Slope of Enlightenment Time Hopes
  29. 29. Behind the Hyperbole <ul><li>We should beware of the hype of others – and watch out for doing it ourselves </li></ul><ul><li>Some “great ideas” never make it – usually because there are better ideas out there, sometimes because incumbents can use complementary assets to stop disruptive innovation </li></ul><ul><li>But there sometimes is a great idea which simply requires a lot of other things falling into place before it can sweep the world (or at least, grab a solid niche). </li></ul>
  30. 30. Though the bubble burst… <ul><li>Some estimates have it that as many as 50% of the dot com firms started up in the bubble were still active in 2004 (which makes half “dot bombs” </li></ul><ul><li>Many major success stories were established then: Amazon, eBay, Google </li></ul><ul><li>E-business has steadily recovered from the bubble </li></ul><ul><li>Though there may be other bubbles ahead </li></ul>
  31. 31. Business Model Thinking <ul><li>Efforts to understand these new businesses came from enthusiasts and sceptics alike. </li></ul><ul><li>The notion of a business model came to the fore as the new entrepreneurs dismissed concerns about their viability – “you just don’t get it” </li></ul><ul><li>And there certainly were efforts to raise funds in original ways, and envision sustainable future business based on different revenue streams </li></ul>
  32. 32. Business Model Fever <ul><li>Often seen as essentially about how you make money </li></ul><ul><li>Here is the basic idea from the BUSINESS MODELS ON THE WEB page by Michael Rappa, at http:// </li></ul><ul><li>But is this just the revenue model, only part of the whole Business Model? </li></ul><ul><li>And why a “model”, anyway? </li></ul>
  33. 33. <ul><li>Many bad business models went down in the dot com crash, and so did some good ones. Some achieved enormous success, others have just hung on. There are many reasons for failure, and a poor Business Model is only one. Whether you can survive in a competitive environment without an effective Business model is another question! </li></ul>LATER LECTURES WILL CONSIDER: BUSINESS PLANS and MODELS; ELEMENTS OF BMs; e-BN designs
  34. 34. 20, Myasnitskaya str., Moscow, Russia, 101000 Tel.: +7 (495) 621-2873 , Fax: +7 (495) 625-0367 Higher School of Economics, June 2011