The Digital TransformationNew information technologies,s.docx

The Digital Transformation
New information technologies,
such as broadband networks,
mobile communications and the
Internet, have well-known, but
often unrealized, potential
to transform businesses and
industries. The key to success is
knowing how and when to apply
the technologies. Companies
should look at 10 specific
drivers to help determine their
best strategy.
Angela Andal-Ancion,
Phillip A. Cartwright
and George S. Yip
uring tbe 1990s, companies bad vast amounts of funding for

new
D information technologies, or NIT' Tbey invested millions of
dol-lars on Web sites, sophisticated software packages,
teleconferenc-
ing equipment, broadband networks, mobile communications
and other digital technologies. Such investments helped them to
keep abreast
of competitors tbat were making similar expenditures. Today,
many compa-
nies are strapped for resources, and they need to be extremely
selective about
the technologies they fund, deploying NIT in ways tbat are tbe
most relevant
to their businesses and strategic objectives, including their sales
and market-
ing efforts.
What kinds of companies and products can benellt most from
the use of
NIT? Books and airline tickets sell readily over the Internet
wbereas automo-
biles and higb fashion clothing do not. Furtbennore, what types
of business
transformations do sucb investments enable? A company might,
for example,
use NIT to cut away layers of middlemen, such as distributors,
that separate it
from its customers (called classic disintermediation). Or,
instead of getting rid
of middlemen, it might choose to embrace them {remediation).
Or it might
build strategic alliances and partnerships with new and existing
players in a
tangle of complex relationships (network-based mediation).

(See"Tbree Medi-
ation Strategies," p. 37.)
All three mediation strategies depend on various factors, such
as a prod-
uct's customizability and information content. By fully
understanding those
drivers of NIT, companies can begin to predict tbe potential
transformations
of tbeir industries, especially in terms of how products are
marketed and sold.
To tbat end, we have developed a systematic framework tbat
identifies wbich
drivers are important for tbe different approaches of classic
disintermediation,
remediation and network-based mediation. Using this tool,
companies can
determine both the optimum ways to transform tbeir businesses
and the NIT
investments required to accomplisb sucb changes.
The Drivers of NIT
From a study of large corporations in Nortb America and
Europe, we have
identified tbe different drivers that determine the competitive
advantages of
deploying NIT. (See "About the Research.") Each of the drivers
is very specific
to bow NIT can be applied in a particular industry. Tbat Is, they
are not gen-
Angela Andal-Ancion is a ajnsultant with ascension in London;
Phillip A. Cartwright
is a principal with BearingPoint in Paris; and George S, Yip is
professor ot strategic and
international management at the London Business Schooi. They

can be reached at
[email protected], [email protected] and [email protected]
3 4 MIT SLOAN MANACEMENT REVIEW SUMMER 2003
of Traditional Businesses

eral factors, such as the overall cost of a technology. And they
are different from the critical success factors that affect the
implementation of information technology and that are mostly
specific to a company, as opposed to being characteristic of an
industry,^ Several of the drivers are obvious, and some have
been identified previously. There are a total of 10, and they fall
into three categories. (See "The 10 Drivers of New Information
Technologies," p. 38.)
1. Electronic deliverahHity. Some products have a large compo-
nent that can be delivered electronically. Airline companies, for
instance, enable customers to book reservations online, after
which the confirmations and tickets can be delivered efficiently
through e-mail. On the other hand, NIT has not been as
effective
with car shopping. Consumers can get information on different
models and compare prices over the Web, but they still need to
test drive the vehicles and physically
inspect them before taking delivery.
2. hiformation intensity.^ N e a r l y all
products and services have some infor-
mation content, but the amount varies
dramatically. Cars come with volumes

of operating instructions; ice cream
bought from a street vendor comes
with no information except the name
of its flavor. With books and maga-
zines, the information they deliver is
the product. In the past, information
was limited and difficult to collect, and
customers often had to shoulder the
burden of extracting the data they
needed by sorting tbrougb manuals
and other documentation or by calling
toll-free numbers for help. The advent
of new technologies such as the Web
has enabled companies to leverage the
information content that is inher-
ent in their products and services. Of
course, products and services with greater information intensity
have more potential to benefit.
3. Ciistortjizability.'^ NIT allows many companies to tailor an
overall offering to the specific needs and preferences of individ-
ual customers. In the past, newspapers were a one-size-fits-all
product. Today, online editions can be customized to include
just the news and information that a particular subscriber is
likely to want. Similarly, customers of Dell Computer can pur-
chase a PC with just the right disk space, microprocessor power
and other features that they need. NIT {specifically, sophisti-
cated software for supply-chain management) enables Dell to
sell such made-to-order computers al competitive prices. With
other products like small home appliances (toasters or coffee
makers) though, there is much less opportunity lo protit irom
such customization.
<> laantu Szachomka/SIS SUMMER 2003 MIT SLOAN
MANAGEMENT REVIEW 3 5

4. Aggregation effects} Products and services differ in the way
they can be aggregated or combined. In the past, U.K. customers
dealt with a hank for their savings and day-to-day transactions,
a
building society for their mortgages, an insurance agent for life
and property policies, and an independent financial adviser for
their investments. Thanks to NIT (and deregulation},
institutions
can offer customers bundled services (with attractive interest
rates and better terms) to handle all those financial needs
through one account. In addition to convenience, aggregation
also affords customers greater confidence. For example, many
consumers have begun to buy more than just books from Ama-
zon.com, which now offers toys, clothing, tools and other items,
because they are familiar with the Weh site and trust the quality
of its products and service.
About the Research
We conducted case research of 20 large companies in
North America and Europe across different industries to
discover the effects of new information technologies (NIT)
in transforming industries and value chains. Participants
included Alstom, Amazon.com inc., AutoNation Inc.,
Boo.com, Cemex, Chemdex, Dell Computer Corp., Eastman
Chemical Co., easyJet Airline Co., FedEx Corp., Google.
Lafarge, Levi Strauss & Co., Oracle Corp., Polaroid Corp.,

Ryanair, Schneider Electric, Tesco, Thomson and Toys "R"
Us. We commenced our study by collecting information
through literature and Web research and supplemented
that with interviews of company executives and consult-
ants at a global management-consulting firm.
5. Search costs. Before the advent of companies like Amazon.
com, finding an out-of-print book could require considerable
time and effort.*" Now, the Weh provides people with vast
amounts of information, regardless of their location or time
zone, lowering the search costs for finding exactly the product
or
service they want. NIT has also introduced more transparency in
transactions: Customers and suppliers can now cc^mpare prices,
product features and service attributes online. Nevertheless,
although NIT has transformed markets that had high search
requirements in the first place (for example, the travel
industry),
it has not achieved the same for other products, such as a pair of
socks whose characteristics (color, size and thickness) are
limited
and generally remain constant. This explains why most con-
sumers still buy their socks through traditional channels, by
physically going to a store or by ordering from a mail catalog.
6. Real-time interface. A real-time interface is necessary for
com-
panies and customers dealing with important information that
changes suddenly and unpredictably. A good example is online
trading, in which rapid fluctuations in the stock market can be

devastating for those who lack instantaneous access to that
infor-
mation. But a real-time interface is also important for customers
who do not want to he constrained to transacting husiness dur-
ing normal office hours. At home at night, for instance, they
might want to transfer money from their savings account, order
a gift for someone or track a package they've sent. In contrast,
customers who drop off clothes to a dry cleaner only need the
information on the collection tag, telling them the pickup dale.
That is, real-time updates are of little value when the pertinent
information rarely changes.
7. Contracting risk. Buying new hooks online has little contract-
ing risk for customers: Prices are relatively low; specifying the
exact titles is straightforward; the physical quality of books
varies
little; and merchants are motivated to fulfill each order
efficiently
to encourage customers to return (and, anyway, if an order is
mishandled, the cost to the consumer is minimal). Buying cars
online is a completely different matter: Prices are suhstantially
higher; specifying the exact product is difficult; the physical
qual-
ity of the vehicles (for example, their color) can be different
from
the descriptions on a Web site; and sellers do not typically
expect
repeat purchases, so they might be less motivated to deliver pre-
mium service.
8. Network effects.'^ In many industries, the utility of a good or
service increases with the number of people who are using it (or
one that is compatihle). A key henefit of using Microsoft
Office,
for instance, is that the suite of programs is ubiquitous in the
business world, enabling people to share Word, PowerPoint and

Excel documents easily. With other products and services
though,
the relationship is reversed. People who purchase status goods,
for example, are drawn to such products because of their exclu-
sivity. An example of network effects with respect to business
partners is the Automotive Network eXchange Network (ANX),
which General Motors Corp., Ford Motor Co. and Daimler-
Chrysler created to support automated interactions with their
parts suppliers. ANX defines a set of technology and service-
quality standards for exchanging critical transaction and plan-
ning documents over the Web, thereby enabling a large network
of partners to conduct business efficiently.̂
9. Standar(^ization benefits. NIT has enabled companies to syn-
chronize and standardize certain processes, resulting in greater
efficiency in business-to-business transactions as well as
increased
convenience for customers. In the banking industry, the
standard-
ization of automated teller machines through shared networks
has
allowed people to withdraw cash from their accounts and check
tlieir balances even when they are traveling internationally.
That
is, they are not limited to the proprietary ATMs of their own
bank.
3 6 MIT SLOAN MAMACEMENT REVIEW SUMMER 2003
On the Web, the extensible markup language
(XML) family of standards will significantly
increase a company's ability to broadcast a message
to a wide audience in the most efficient and pow-
erful way. But businesses that do not rely heavily on

NIT (the restaurant industry, for instance) will see
fewer direct benefits from standardization.
TRADITIONAL
VALUE CHAIN
JO. Missing competencies.'^ NIT can facilitate com-
pany alliances in which partners use each other to
fill in missing competencies (defined as activities
that an organization lacks internally but that are
critical to an overall product or service offering). In
1994, for example, Air Canada decided to outsource
all of its IT operations to IBM — an unusual move
at the time. Seven years later, the company made
IBM its partner in a bid to recoup some of its
expenses in developing new airline-specific tech-
nology.'" Through the arrangement, IBM is helping
Air Canada to improve a number of its products and services,
such
as providing passengers with in-flight Internet access. In
contrast,
NIT provides fewer opportunities for industries (usually low-
tech
ones) in which companies can be more self-sufficient.
Three Mediation Strategies
The 10 drivers determine what type of mediation approacb is
most likely to succeed in a particular industry. (See "NIT
Drivers
and the Three Mediation Strategies," p. 39.) For each ofthe
three
strategies, a couple of drivers are dominant, several are
ancillary,
and others have little consequence.
Classic disintermediation is affected mainly by drivers that

pertain to the inherent characteristics of a product or service.
Specifically, electronic deliverability is a major factor. That is,
why
use a distributor when a product or service can be delivered
elec-
tronically to the customer? Information intensity is another
dominant driver. Before NIT, products or services with high
information intensity often needed intermediaries, such as an
insurance agent, to explain a complex policy. Now, a sophisti-
cated Web site can perform much of that functionality. Less
pow-
erful drivers of disintermediation include customizability,
search
costs, real-time interface and low contracting risk. An industry
that benefits from technology that provides a real-time
interface,
for instance, will favor disintermediation in order to eliminate
the time lag caused by middlemen.
Remediation is affected mainly by two drivers: aggregation
effects and high contracting risk. When there are benefits to
combining products or services, companies can use NIT to work
more closely with their middlemen partners, building strong,
ongoing relationships. Some insurance companies, for example,
now provide potential customers with online estimates of differ-
Three Mediation Strategies
In classic disintermediation, NIT is used to eliminate
organizations that are
seen to be standing in the way of a fast and efficient transaction
(that is, cut-
ting out the middleman). In remediation, NIT is used to
strengthen existing and
new relationships between suppliers/producers, distributors and
customers. In

network-based mediation, new and established players use NIT
to build a net-
work of strategic alliances and partnerships in complex
relationships.
CLASSIC
DISINTERMEDIATION REMEDIATION
NETWORK-BASED
MEDIATION
Supplier/
Producer
Distributor
Customer
NEW INFORMATION TECHNOLOGIES
ent policies through the Web site of the Automobile Association
of America (www.aaa.com). High contracting risks also encour-
age companies to use NIT to establish closer — and more secure
— relationships. Ford, for instance, relies on the Web-based
applications of middleman Vastera Inc., a Virginia-based firm,
to
handle import and export processes, customs clearance, trade-
regulation compliance and cost calculations for shipments to
Mexico and Canada." Other drivers of remediation are cus-
tomizability (if the middleman can contribute to the customiza-
tion process rather than get in its way), real-time interface (if
the
interface is between the middleman and either the producer or
customer — and not between the producer and customer, which
would instead encourage disintermediation) and missing compe-
tencies. Note also that, as discussed earlier, high search costs

tend
to favor disintermediation instead of remediation.
Network-based mediation is affected mainly by drivers that
pertain to a company's interactions with its partners and
competi-
tors. Specifically, network effects and standardization benefits
are
clearly important reasons for industry players to work more
closely
together. Other drivers include high search costs (which favor
the
use of a network for locating products and information), the
need
for a real-time interface (which encourages partners to build an
NIT system that enables them to deal with each other in real
time)
and missing competencies (which encourages companies, even
competitors, to partner with one another to fill those gaps).
Classic Disintermediation A good example of classic
disintermedi-
ation is easylet Airline Co., the British low-cost airline. Since
its
first flight in 1995, easylet has spurred the transformation of the
European travel Industry by allowing customers to book flights
online. That process bypasses travel agents, which enables the
SUMMER 2003 MIT SLOAN MANAGEMENT REVIEW 3 7
Classic disintermediation is tricky because a company must then
become a one-man show,
assuming the full responsibility of maintaining its relationships
with customers.

company to offer lower fares. Details of easyjet's operations
reveal the important role of different NIT drivers in the com-
pany's success.
Electronic deliverahHity. The first step v̂ 'as for easyjet to
convert
certain physical activities into digital processes. For starters,
easy-
Jet sold more than 90% of its tickets over the Internet, which
meant there were no middlemen adding unnecessary costs. The
company also pioneered ticketless travel in Europe: Passengers
who hook online receive just an e-mail containing their travel
details and confirmation numhers. This innovation helped
reduce the cost of issuing, distrihuting, processing and reconcil-
ing millions of tickets each year.
Information intensity. Emhracing the concept of the paperless
office, easyjet implemented the motto If it's possible,
reasonable
or feasible, we'll do it over the Net. For example, easyjet
scrapped
its traditional hiring system in lieu of online methods, even
recruiting pilots principally through its Web site. Candidates
use
the site to obtain joh specs and fill out application forms.
Subse-
quent correspondence between prospective pilots and easyjet is
also conducted online, with physical contact taking place only
for
those candidates who successfully pass the early rounds. The
sys-
tem has had a side benefit: In anticipation of future growth,
easy-
Jet was easily able to build a database of potential recruits from
the electronic information collected.

The 10 Drivers of New Information Technologies (NIT)
Type of Driver
Inherent characteristics of product or service
Interactions between company and its customers
Interactions between company and its partners and competitors
Search costs. To facilitate price comparisons with competitors,
the easyjet Web site remembers essential passenger information
so that customers do not have to reenter details if they want to
experiment with various travel dates and times. For registered
users, the system also keeps track of details (for example, flight
destinations, number of passengers, and so on) from one book-
ing session to the next, thus personalizing the Web experience
and simplifying future reservations.
Real-time interface. The easyjet Web site provides
instantaneous
cost-per-seat comparisons with competitors, thereby guarantee-
ing customers the lowest prices for the flights they book. More-
over, customers have access to such information on a 24/7
basis.
For easyjet, eliminating middlemen has heen an effective
strategy.
But classic disintermediation is tricky because a company must
then become a one-man show, assuming the full responsibility
of
maintaining its relationships with customers.'^ Consider Levi
Strauss & Co., which tried to go it alone in e-commerce.'-' Ini-
tially, the clothing giant thought It could keep the cyber market
to itself by investing millions of dollars in its Web project and
by

preventing retailers from selling Levi's jeans and other clothing
online. But less than a year later, the company scrapped its
efforts
for selling direct on the Web and left such sales to retailers like
J.C. Penney Co. Inc. and macys.com Inc.
An analysis of NIT drivers helps explain Levi's failure. Of the
five key drivers for classic dis-
intermediation, only one (low
contracting risk) applies to the
mass market for jeans. The other
four (electronic deliver ability,
information intensity, high
search costs and a need for real-
time interface) have little rele-
vance. Levi's experience brings
home the important lesson that
Driver
1. Information intensity
2. Customizability
3. Electronic deliverability
4. Aggregation effects
5. Search costs
5. Real-time interface
7. Contracting risk
8. Network effects

9. Standardization benefits
10. Missing competencies
it's not always feasible for com-
panies to go it alone in dealing
with their customers. Even NIT-
enabled firms have learned that
retailers, distributors and other
middlemen are often better
3 8 MIT SLOAN MANAGEMENT REVIEW SUMMER 2003
NIT Drivers and the Three Mediation Strategies
Type of Driver
Inherent characteristics of product
or service
Interactions between company and
its customers
Interactions between company and
its partners and competitors
Classic Disintermediation
Electronic deliverability
Information intensity
Customizability

Search costs
Real-time interface
Low contracting risk
Remediation
Aggregation effects
(Customizability)
High contracting risk
(Real-time interface}
Missing competencies
Network-Based Mediation
Search costs
Real-time interface
Network effects
Standardization benefits
Missing competencies
Bold = dominant drivers • = favorable only if the intermediary
plays a roie
equipped to fill operational gaps, handling consumer
interactions,

promotions and service demands such as product returns.
Remediation Companies like Toys "R" Us do not use NIT to cut
out
middlemen.'^ Quite the contrary, they deploy NIT to work more
closely with their value-chain partners. Details of the operations
ot
such firms help illuminate the importance of certain NIT
drivers.
Aggregation effects. Grocery shopping can be a mundane and
time-consuming task, so the idea of using the Weh to perform
the
chore has inherent appeal. But, then, why did U.S. startups such
as Webvan and Peapod Inc. initially fail? To answer that,
consider
the success ofTesco.com, an online shopping service provided
hy
Tesco, the U.K. supermarket giant.'-'' Tesco.com has become
the
world's largest online grocery retailer, and it is one of the most
popular U.K. shopping destinations on the Web. In 2001, it had
more than 1 million registered users and received more than
70,000 orders per week. One reason for that success is that

Tesco
aggregates by using its existing supermarkets as warehouses for
its online business (in contrast to Webvan and Peapod, which
started off as stand-alone operations that had to build vast new
warehouse facilities, incurring huge capital costs).
High contracting risk. One reason for the success of middleman
eBay is that the auction service helps reduce the contracting
risks
between buyers and sellers. Items sold on eBay often have
expen-
sive prices, great complexity in product specification and wide
variability in quality. Furthermore, many of those products also
have a low potential for repeat business. To reduce the contract-
ing risk, eBay has implemented a system through which huyers
rate sellers. Also, eBay relies on other intermediaries — for
exam-
ple, SquareTrade, a company that licenses certain vendors and
helps resolve disputes between buyers and sellers — to further
reduce the contracting risk. Because of this, eBay, which started
off handling mainly C2C sales, has increasingly been moving

into
B2C and even B2B transactions.
Missing competencies. After it failed to deliver toys in time for
Christmas 1999, Toys "R" Us quickly realized that it needed
help
with the logistics of electronic retailing. So the company
partnered
with middleman Amazon.com, which now provides the online
platform for Toys "K" Us products. Through the arrangement.
Toys
"R" Us selects the merchandise and owns the inventory, and
Ama-
zon.com provides the Weh site and fulfills the orders. The com-
puter systems of both companies are linked to maximize
operating
efficiencies and provide customers with certain henefits. For
instance, new products offered by the toy retailer are promoted
on
the Amazon.com Web site, and items bought there can be
returned
or exchanged through any of the Toys "R" Us physical retail
oudets.

Thanks to the partnership. Toys "R" Us gains not only a reliable
online distribution channel for its products but also the positive
association with a leading Internet pioneer. And the company is
now free to concentrate on its strength: toy retailing.
Network-Based Mediation In general, customers dislike heing
lim-
ited to a single provider."' Instead they want the convenience
and
broad selection of multiple vendors. Similarly, suppliers do not
want to be limited to a single customer, even if it is a large
corpo-
ration. The strategy of network-based mediation addresses such
issues. Because players are free to interact in the network, they
can
each carve out their own spaces, sometimes creating
opportunities
that did not exist before. Consider Eastman Chemical Co.,
which
manufactures and markets chemicals, fibers and plastics.'-^
Network effects. To expand its network of business partners,
East-
man created an Internet portal {PaintandCoatings.com) that

SUMMER 2003 MiT StOAN MANAGEMENT REVIEW 3 9
An interesting development with network-based mediation is the
establishment of
large-scale systems in which an entire industry attempts to
establish 62B connectivity.
provides value-added information to a community of users of
coating products. The portal has allowed Eastman to extend its
reach into this market segment, opening the door to new oppor-
tunities. In addition, Eastman has participated actively in spe-
ciakhem.com, a comprehensive technology Web site for the
chemical industry with a large membership of thousands of
tech-
nical and R&D people around the world. The site enables those
professionals to interact with Eastman's technical experts, who
might then recommend some of Eastman's products as part of
a proposed solution. Through specialchem.com, Eastman has
developed numerous contacts and relationships, identified
emerging technical trends, and found new projects with
potential
sales opportunities.
Standardization benefits. Eastman collaborated with its peers to
form a working group of the top 20 to 30 chemical companies.
Their initiative, called the Chemical Industry Data Exchange
(CIDX), created a standard format and language for transferring
data electronically among different organizations. CIDX proved
particularly effective in stopping the proliferation of incompati-
ble systems across companies, users and industries.
Search costs. The chemical and materials industry is character-
ized by high search costs: significant fragmentation of buyers

and
sellers, considerable regulatory oversight and complex informa-
tion exchanges across the supply chain. CIDX enables data to be
interchanged more easily, and NIT facilitates that process, mak-
ing it simpler for buyers and suppliers to communicate their
requirements, thereby decreasing search costs and making the
supply chain more collaborative and efficient.
Real-time interface. Eastman used NIT to differentiate itself by
offering superior customer service. The process began with a
fun-
damental shift from focusing on internal efficiency to changing
the very nature of the customer-engagement process. Instead of
managing a number of internal documents containing informa-
tion that would then be relayed to the customer via fax, e-mail
or
phone, Eastman used NJT to provide a real-time, global
interface
to offer customer service on a 24/7 basis. To do so, Eastman
had
to decouple the customer interface from the company's rigid
internal process and then provide a flexible layer of integration
between the two. In 1998, the company launched a Web site
(wv/w.eastman.com) that contains company and product infor-
mation and provides customers with order-entry and tracking
functions, as well as up-to-date account information enabling
them to manage their purchasing levels better.
Missing competencies. Early on, Eastman realized the potential
of
NIT to change the landscape of the chemicals industry, and it
knew
it had to build its competence in this area. So it formed an
internal
group dedicated to looking at how emerging digital technologies

could affect business models in the chemical industry. The
work-
ing group, dubbed Emerging Digital Technologies (EDT),
applies
rigorous tests on new technologies before recommending that
Eastman either adopts them companywide or fimds them
through
Eastman Ventures, its venture capital arm. Through the
initiative,
for example, Eastman has partnered with webMethods Inc., a
lead-
ing provider of integration software, to adapt and refine that
com-
pany's products to the specific needs of the chemical industry.
Today, webMethods solutions are present in the linkages among
the enterprise-resource-planning (ERP) systems of many
chemical
companies, enabling efficient transactions.
Eastman was hardly the only company to use a strategy of
network-based mediation. Indeed, "If you build it, they will
come" became the mantra of hundreds of B2B exchanges that
sprouted during the Internet boom.'^ Eor various reasons,
though, many of them flopped. Case in point: Chemdex Corp.,
the B2B e-commerce firm that specialized in enabling science
professionals to buy hard-to-find chemicals and compounds.'^
Chemdex thought it was positioned for success with a business
model that seemed to fill a real market need. Yet even as the
com-
pany managed to secure millions of dollars in venture capital to
build a thriving network of suppliers and users, all connected
through digitized transactions, success was still elusive. The
prob-
lem was that Chemdex lacked an essential ingredient for
network
success: strong relationships with its trading partners.

In contrast, when Eastman formed a similar B2B venture, it
relied heavily on its existing relationships with partners. That
facilitated Eastman's efforts to create a virtual network with
them, enabling the secure exchange of highly specific and some-
times sensitive information, much like the transactions of online
banking. This advanced level of connectivity not only empow-
ered Eastman's trading partners by providing them with greater
4 0 MIT SLOAN MANAGEMENT REVIEW SUMMER 2003
and more varied access to the company, it also increased the
trust
and depth of the relationships between them.
An interesting development witli network-based mediation
is tbe establishment of large-scale systems in which an entire
industry attempts to establish B2B connectivity. One example is
Elemica, the global network for chemical buying, selling and
sup-
ply-chain management. Elemica provides a tremendous numher
of connections (and thus myriad transaction opportunities),
greater than any single company could have established with its
own network. But although this type of network seems to have
achieved a domino effect in terms of widespread adoption, its
current focus on achieving transactional savings might be short-
sigbted. Eastman's experience in private B2B connections with
strategic partners suggests tbat greater value can be obtained by
re-engineering relationships to solve the business-specific pain
points found in the interactions between trading partners.
THE NUMBER OF technologies and software capabilities that
exist
today far exceeds tbat whicb any company could ever possibly

adopt. And even newer information technologies are currently
being developed for future use. Indeed, the availability of NIT
is
not the problem, histead, tbe issue is choosing wbich technolo-
gies to deploy — and to what purpose. To be sure, different
industries offer companies differing potential for using NIT to
transform their husinesses through three types of mediation
strategies. By looking at the 10 drivers of NIT, companies can
determine the mediation approach that will work best for their
particular businesses.
The examples of companies like easyjet and Eastman have
sbown tbe power of NIT to transform an industry. Eor Eastman,
networks enabled instant connectivity to customers as well as to
fellow members gf the value chain. But thafs just part of the
story.
Both new and established companies participating in the
netvi'ork
still faced significant burdles in using NIT to optimize their
busi-
ness operations. For new players, tbe cballenge was to develop
a
profitable and scalable business model, with NIT as a tool. For
establisbed players, the obstacles were often more daunting,
because tbe entire organization needed to adopt the right
attitude
to adapt to new business methods. In otber words, determining
the best mediation approacb ismerely tbe first step of along
jour-
ney. Companies must tben execute tbat strategy, implementing
substantial changes in their organizations, along witb all the
nec-
essary business restructuring that they entail.
ACKNOWLEDGMENTS

The authors gratefully acknowledge the initial work and help of
Claire
Stravato and Nick Dussuyer. They are also thankful for the
valuable
input of Taras Wankewycz, Eric Pilaud, Fernando Suarez. Len
Waver-
man and Bruce Weber. Financial support from the Centre for the
Net-
work Economy at the London Business Sohool is also gratefully
acknowledged.
REFERENCES
1. We define NIT as information technologies oommercialized
in
the 1990s as well as the more intensive and extensive
applications
of earlier information and communication technologies, or ICT.
2. See, for example, the "critioal success factors." which are
quite
different from our drivers, in J.F. Rookart, "The Changing Role
of the
Information Systems Executive: A Critical Success Factors
Perspec-
tive." MIT Sioan Management Review 24 (fall 1982): 3-13.
3. For some arguments for this driver, see Y. Bakos, "The
Emerg-
ing Role of Electronic Marketplaces on the Internet,"
Communica-
tions of the Association for Computing Machinery 41 (August
1998):
35-42.
4. See A. Siywotzky, T h e Age of the Choiceboard," Harvard

Business
Review 78 (January-February 2000): 40-41.
5. See S. Madnick and M, Siegel, "Seizing the Opportunity:
Exploiting
Web Aggregation/' MIS Quarterly Executive 1 [March 2002): 1-
15: and
Y. Bakos and E. Brynjolfsson, "Bundling and Competition on
the Inter-
net," Marketing Science 19 (winter 2000): 63-82.
6. For similar examples, see S. Konicki, "A Page From
Amazon's
Book," lnformationweek.com, Sept. 17, 2001,105-107.
7. See R Cartwright, "Only Converge: Networks and
Connectivity in
the Information Economy." Business Strategy Review 13
(summer
2002): 59-64: and 0. Shy, "The Economics of Network
Industries"
(Cambridge, U.K.: Cambridge University Press, 2001).
8. J.E. Frook, "Automotive Extranet Lights Fire Globally."
Internetweek,
Apr. 20, 1998, special volume, 1.
9. See W- Ebeling and A. Snyder, 'Targeting a Company s Real
Core
Competencies," Journal of Business Strategy 13 (November-
Decem-
ber 1992): 26-32.
10. J. DiSabatino, "IBM and Air Canada Expand Relationship,"
Com-
puterworld, July 30, 2001, 61.

11. M. Songini, "Ford Gets Help With Global Supply Chain,"
Comput-
erworld, July 30, 2001, 12.
12. A similar argument is put forward by D. Rogers, "Who's
Afraid of
Disintermediation?" Catalog Age 17 (August 2000): 12-13,
13. J. King, "Disintermediation/Reintermediation,"
Computerworld,
Dec, 13, 1999,54-55.
14. For discussions related to remediation, see S, Vandermerwe,
"The Electronic Go-Between Service Provider: A New Middle
Role
Taking Centre Stage," European Management Journai 17, no. 6
(December 1999): 598-608; and P Anderson and E. Anderson,
"The
New E-Commerce Intermediaries," MIT Sloan Management
Review
43 (summer 2002): 53-62,
15. See www.tesco.com,
16. For a discussion of network-based mediation, see N, Cam
"Hyper-
mediation: Commerce as Clickstream," Harvard Business
Review 78
(January-February 2000): 46-47.
17. See also L. Downes, "The Strategy Machine" (New York:
Harper
Collins Publishers. 2002): 76-80, 93-96 and 127-128.
18. See "Business: Time To Rebuild," The Economist, May 19,

2001,
55-56.
19. See "Wharton: The Chemdex Approach to B2B E-
Commerce,"
May 2000,
http://www.ebizchronicle.com/wharton/07_chem.htm: and
P. Samec, "Thinking Ahead on E-Marketplaces,"
Computerworld, July
2, 2001, 24.
Reprint 4 4 4 9 . Fur ordering iiifonnaiion, sec page !.
Copyright © Massaduiselts Institute of Technoiagy, 2003. Ali
rights reserved.
SUMMER 2003 MIT SLOAN MANACEMENT REVIEW 4 1
Business Models
for Internet-Based
E-Commerce:
A N ANATOMY
B. Mahadevan
T
he growth of Internet-based businesses is truly meteoric. It has
dwarfed the historical growth patterns of other sectors. Over the
years,
several organizations doing business through the Internet have
come

out with their own set of unique propositions to succeed in the
busi-
ness. For instance Amazon.com demonstrated how it is possible
to "dis-interme-
diate" the supply chain and create new value out of it.
Companies such as
Hotmail and Netscape made business sense out of providing free
products and
services. On the other hand, companies such as AOL and Yahoo
identified new
revenue streams for their businesses. Similarly companies such
as Vertical Net
engaged in building on-line communities. It is increasingly
becoming clearer that
the propositions that these organizations employed in their
businesses could
collectively form the building blocks of a business model for an
Internet-based
business.' Several variations of these early initiatives as well as
some new ones
being innovated by recent Internet ventures have underscored
the need for
some theory-building in this area.
This article develops a framework that can help practicing
managers
understand the notion of a business model in the Internet
context. Is there a
basis on which one can classify these new propositions? Are
there any factors
that could potentially influence an organization in identifying
an appropriate
sub-set of these propositions for its business?
Barua et al. proposed a four-layer framework for measuring the

size of
the Internet economy as a whole.^ The Internet infrastructure
layer addresses the
This research is partly supported by the Center for Asia and the
Emerging Economies at the Amos
Tuck School of Business Administration, Dartmouth College.
CALIFORNIA MANAGEMENT REVIEW V O L 42, NO. 4
SUMMER 2000 55
Business Models for Internet-Based E-Connmerce: A n
Anatonny
issue of backbone infrastructure required for conducting
business via the net. It
is largely made up of telecommunication companies and other
hardware manu-
facturers of computer and networking equipment. The Internet
applications layer
provides support systems for the Internet economy through a
variety of software
applications (ranging from web page design to security) that
enable organiza-
tions to commercially exploit the backbone infrastructure. The
Internet interme-
diary layer includes a host of companies that participate in the
market making
process in several ways. Finally, the Internet commerce layer
covers companies
that conduct business in the context provided by the other three
layers.
The Internet infrastructure layer and the applications layer play

a crucial
role in moderating and setting trends for the growth of the
Internet economy.
However, the notion of a business model must focus on the last
two layers for
two main reasons:
• The growth of the intermediary and the commerce layer is
significantly
higher than that of the other two layers. Barua and Whinston
reported a
127% growth in the commerce layer during the first quarter of
1999 over
the corresponding period in 1998.' Furthermore, one in three of
3400
companies that they studied did not even exist before 1996.
They also
reported that 2000 new secure sites are added to the web every
month
indicating the creation of new companies and a migration of
existing
brick and mortar businesses.
• The extensive customer interaction in these two layers has
offered more
scope for creating unconventional business models and hence
offers more
scope for identifying certain typologies.
There has been no attempt to provide a consistent definition for
a business
model in the Internet context. Meanwhile, consultants and
practitioners have
often resorted to using the term "business model" to describe a
unique aspect of
a particular Internet business venture. This has resulted in

considerable
confusion.
For present purposes, the term "Internet-based e-commerce"
does not
include organizations that have merely set up some web sites
displaying infor-
mation on the products that they sell in the physical world. Only
those organiza-
tions that conduct commercial transactions with their business
partners and
buyers over the net (either exclusively or in addition to their
brick and mortar
operations) are considered. Henceforth, the term "Internet
economy" is also
limited by the scope of this definition.
The Emerging Market Structure
The Internet economy has divided the overall market space into
three
broad structures: portals, market makers, and product/service
providers. A portal
engages primarily in building a community of consumers of
information about
products and services. Increasingly, portals emerge as the focal
points for influ-
56 CAUFORNIA MANAGEMENT REVIEW V O L 42, NO. 4
SUMMER 2000
Business Models for Internet-Based E-Commerce: A n Anatomy
encing the channel traffic into web sites managed by

product/service providers
and other intermediaries. They primarily play the role of
funneling customer
attention or "eyeballs" into these web sites in a targeted fashion.
Companies
such as AOL and Yahoo largely cater to the business-to-
customer segment.
ZDNet and MarketSite.net (promoted by Commerce One) are
examples of por-
tals serving the business-to-business segment.*
The market maker is another emerging structure in the Internet
market
space.' Market makers play a role similar to that of a portal in
building a com-
munity of customers and/or a community of suppliers of
products and services.
However, they differ from portals in several ways. Market
makers invariably
participate in a variety of ways to facilitate the business
transaction that takes
place between the buyer and the supplier. Consequently, a
market maker is
often expected to have a high degree of domain knowledge. For
instance, a por-
tal such as Yahoo can funnel the traffic of prospective computer
and software
buyers into web sites that provide services related to selling
these products.
However, a market maker such as Beyond.com requires a higher
domain knowl-
edge related to the buying and selling of computer and software
products. Also,
unlike a portal, a market maker endeavors to provide value to
suppliers and
customers through a system of implicit or explicit guarantee of

security and trust
in the business transaction. Auction sites such as eBay are the
early market mak-
ers in the business-to-consumer segment. Some examples of the
large number of
market makers evolving in the business-to-business segment
include Chemdex
(Chemicals), HoustonStreet.com (Electricity), FastParts
(Electronic components),
BizBuyer.com (small business products), and Arbinet
(Telecommunication min-
utes and bandwidth). The business-to-business segment has
several characteris-
tics that promote a bigger role for market makers. They include
huge financial
transactions and a greater scope for reducing product search
costs and transac-
tion costs. Since the business-to-business e-commerce
application is poised for
spectacular growth, the role of market makers will be
increasingly felt. The pre-
dominant forms the market makers take in business-to-business
segment
include organizing auctions and reverse auctions, setting up
exchanges, and
product and service catalogue aggregation.
Product/service providers deal directly with their customers
when it
ultimately comes to the Internet business transaction. This calls
for extensive
customization of their information system and business
processes to accommo-
date customer requirements on line. Notable examples in this
category of market
structure include Amazon.com and Landsend.com in the

business-to-consumer
segment and Cisco and Dell Computers in the business-to-
business segment.
These emerging market structures reveal some of the
characteristics of
Internet-based e-commerce business applications. First, each of
these structures
addresses a key constituent in the business that is carried out
over the net. Sec-
ondly, they exist in both business-to-business and business-to-
consumer seg-
ments (Table 1 provides a representative list of companies).
Third, there is a high
level of overlap and inter-dependency among the players in the
three market
SUMMER 2000 57
Business Models for Internet-Based E-Commerce: An Anatomy
T A B L E I . A Sample List of Internet-Based Businesses in the
Emerging Market
Structure
Market
Structure
Portals
Market Makers
Product/Service

Providers'"
Business to
Consumer Segnnent
AOL.com
Askjeeves.com
Compare.com
MSN.com
Personalogic.com
Yahoo.com
Orlando.com
Autobytel.com
Beyond.com
Buycom
Cameraworld.com
Careerbuildencom
Ebags.com
Ebaycom
Etrade.com
NetMarket.com
Priceline.com
Travelocitycom
Ubid.com
Amazon.com
Egghead.com
EthnicGrocencom
Landsend.com
Stacianewyork.com
Business to
Business Segment^
Cnet.com

ec-portal.com
MarketSite.net
Netmarketmakencom
Questlink
SmartOnline.com
VerticalNet
@griculture Online
AdAuction.com
AsianSources.com
Bloomberg
ChemConnect
Manheim Auctions
MRO.com
NetBuycom
PaperExchange.com
PlasticsNetcom
Ultraprise
Works.com
Cisco
Compaq
Dell
a. Many portals in the B2B segment have evolved into market
maker structure.
b. Several existing brick and mortar retailers such as Wal-Mart,
Barnes & Noble, and Sears also engage in Intemet based
businesses
with newly incorporated dot coms. Similar examples exist in
B2B segment also.
Structures. For instance, players in the product/service provider
market succeed

in marketing their products and services through their web site
only when they
catch the attention of prospective customers. In order to do this
they may often
need the support of a portal Meanwhile, the revenue stream of a
portal or a
market maker depends to a large extent on its relationship with
product/service
providers. Finally, since the fundamental purpose for each of
the three market
structures is very different, they have different approaches to
the value that they
offer to their business partners and customers and the manner in
which they
organize their revenue stream.
58 CALIFORNIA MANAGEMENT REVIEW VOL 42, NO, 4
SUMMER 2000
Business Models for Internet-Based E-Connmerce
There have been few attempts to formally define and classify
business
models in the Internet context. Schlachter identified five
possible revenue
streams for a web site.* These included subscriptions, shopping
mall operations,
advertising, computer services, and ancillary business. The
emphasis was to
show how revenue models existing in the brick and mortar
scenario would be
exploited in a web-based business. Fedwa identified seven

revenue-generating
business models.^ In addition to those identified by Schlachter,
Fedwa added
timed usage and sponsorship and public support as possible
revenue streams.
Parkinson stressed the role of business affinities such as logistic
providers in cre-
ating the value proposition.*
These models were too narrow in their scope and did not cover
the gamut
of alternatives employed by today's Internet-based businesses.
Timmers provided
a broader description and identified eleven business models that
currently exist
and classified them on the basis of the degree of innovation and
functional inte-
gration required.' However, these models described a particular
aspect of doing
business over the net and ignored other aspects. A good theory
should ensure
comprehensiveness.'" For instance, Timmers's example of
Amazon.com for
building a virtual community does not bring out another of its
unique features,
e.g., dis-intermediation of the supply chain.
A business model is a unique blend of three streams that are
critical to the
business. These include the value stream for the business
partners and the buy-
ers, the revenue stream, and the logistical stream. The value
stream identifies
the value proposition for the buyers, sellers, and the market
makers and portals
in an Internet context. The revenue stream is a plan for assuring

revenue gener-
ation for the business. The logistical stream addresses various
issues related to
the design of the supply chain for the business.
Value Streams in Internet-Based Business
The long-term viability of a business largely stems from the
robustness of
the value stream, which infiuences the revenue stream and the
logistical stream.
Figure 1 illustrates the value streams in Internet-based business.
Often, buyers
perceive value arising out of reduced product search cost and
transaaion costs.
Further the inherent benefits of the "richness and reach"" of the
Internet pro-
vide an improved shopping experience and convenience.
Suppliers perceive value arising out of reduced customer search
costs,
product promotion costs, business transaction costs, and lead
time for business
transactions. These benefits are likely to be substantial in the
business-to-busi-
ness segment. For instance, Siebel and House reported that car
dealers spend
an average of $ 25 to close business with a buyer referred by
autobytel.com as
opposed to several hundreds of dollars in the brick and mortar
operation.'^
There is virtually a zero customer search cost in such referrals.
SUMMER 2000 59

F I G U R E I . Value Streams in Internet-Based Business
Buyers Perceive
Added Value
Better Price
Improved Service
Greater Convenience
Improvised Experience
Numerous Other Benefits
More Options
for Customers
Increased
Supplier
Base
More Reliance on
Market Makers
and Portals
More
Selling
More
Buying
Market Maker or Portal
Perceives Added Value

Robust Revenue Stream
High Switching Costs for Buyers/Seilers
Suppliers Perceive
Added Value
Reduced Customer Search Costs
Reduced Supply Chain
Transaction Costs
Reduced Sales Promotion Efforts
More Reliance on
Market Makers
and Portals
Increased
Customer
Base
More Business
for Suppliers
The introduction of a market maker or a portal is likely to
increase the
value for both the suppliers and buyers, creating a virtuous
cycle for all three
players. As more suppliers join in the market-making process,
the buyers begin
to see more choices. As more buyers join, the suppliers begin to
experience the
beneficial effects of a wider customer base and lower customer
search costs.
Then the buyers themselves benefit from the growing
community of buyers.

Finally, both the buyers and the suppliers begin to rely on the
market
maker/portal, ensuring a robust revenue stream for the market
maker/portal.
There are four possible value streams in an Internet-based
business:
Virtual Communities
Virtual communities offer a multitude of values to the buyers,
sellers,
market makers, and portals. Communities have a distinctive
focus that brings
together people with common interests. Vertical Net is a
business-to-business
60 CALIFORNIA MANAGEMENT REVIEW VOL 42, NO. 4
SUMMER 2000
site that caters to 56 vertically focused communities.
WebMD/Healtheon is
another community site that caters to medical professionals.
Community sites
provide an ideal platform for the focused groups to generate
value and knowl-
edge and share it among the members. Hagel observed that it is
extremely diffi-
cult to replicate the value proposition of virtual corrmiunities
because much of
the value of these communities is member generated.''
Moreover, communities

induce a high switching cost for its members and thereby
provide first mover
advantage for the organizations that host these communities.
Dramatic Reduction in Transaction Costs
An electronic market place is an inter-organizational
information system
that allows buyers, sellers, independent third parties, and multi-
firm consor-
tiums to exchange information about prices and product
offerings. Moreover,
the cost of product and price comparisons becomes negligible.
A major impact is
that they typically reduce search costs for both the buyers and
the sellers. Bakos
argued that as search costs come down, the prices come down
both in a com-
modity and in a differentiated market.'* Furthermore, as more
and more partici-
pate in this process, the benefits increase due to network
externalities."
Gainful Exploitation of Information Asymmetry
The effects of asymmetric information on market equilibrium
have been
studied in a multitude of economic situations and proposed
models. The models
can be differentiated as search models'* and bargaining
models.'^ These models
provide a role for intermediaries who seek to bring the price-
quality combina-
tions close to efficient informational combinations. Coupled
with the effect of
network externalities, the ubiquitous nature of Internet business

operations has
opened up new value streams that can exploit the information
asymmetry that
exists in many business transactions.
In situations that involve numerous buyers spread over large
geographical
areas and sellers who have perishable products and services it is
possible to
exploit the benefits of information economy into a value
proposition. In the
travel, hotel, and tourism industry there are a variety of product
offerings and a
high level of uncertainty of patronage. Since the services are
perishable in
nature, it is possible to buy out left-over services at a
competitive price and re-
sell them at a higher value. The sellers do not have perfect
information on
demand. Similarly, the buyers do not have perfect information
on the supply.
Therefore, an intermediary can create value arising out of this
information
asymmetry. Priceline.com is an example of such a value stream
in a business-to-
consumer segment. Even in the case of non-perishable items, it
is possible to
exploit the information asymmetry by the setting up online bids
and reverse
auctions.
In the business-to-business segment, information asymmetry
often
exists when there are several potential suppliers for an
industrial bid. By
enabling an online real-time bidding and negotiation process, it

is possible to
CALIFORNIA MANAGEMENT REVIEW VOL42, NO.4
SUMMER 2000 61
obtain substantial reductions in the final bid value. An
intermediary who
enables this process usually creates a value proposition and a
revenue stream
that is linked to the value of the reduction obtained for the
buyer. Free Markets
Online Inc., a Pittsburgh-based intermediary is an example of
this category.'*
Free Markets assists industrial buyers in posting requests for
proposals and hold-
ing Internet-based reverse auctions for their products. By
automating the fiow
of information, a pre-determined number of suppliers can be
effectively included
in the requests for proposal process, resulting in more
competition and lower
costs for the buyer.
Value-Added Market-Making Process
Value streams in the Internet context are sometimes augmented
by addi-
tional value propositions, which can become the main value-
generating stream
in some cases. Security and trust, for instance, are major
concerns in Internet-
based e-commerce and can be used to create a value

proposition. When the
market maker vouchsafes the transactions that take place under
its domain,
it provides significant value to buyers and sellers. The seafood
industry often
brings small buyers and sellers together who don't know each
other. By provid-
ing its trusted third-party credit rating information, Seafax
imparts to buyers and
sellers the confidence to trade with unknown trading partners,
thereby improv-
ing the market liquidity. A similar role in the business-to-
consumer segment is
played by eBay. Providing financial instruments and
establishing guarantees for
the transactions, as well as addressing privacy and delivery
reliability concerns,
also have the potential for creating new value streams. Other
potential value
propositions include buying guides, risk management,
procurement manage-
ment, order fulfillment, financial instruments such as Cyber
Cash, and escrow.
The value streams identified above are not mutually exclusive.
For
instance, organizations creating a value stream on the basis of
online communi-
ties can exploit the benefits of reduced transaction costs or
some additional value
through providing enhanced security. However, organizations
often build their
model on the basis of one dominant value stream. The value
derived from others
is incidental and supplementary to the main value stream.

Revenue Streams in Internet-Based Business
Value streams address the long-term sustainability of the
business propo-
sition and often set the context for identifying revenue streams
for an organiza-
tion. The revenue steam is nothing but the realization of the
value proposition
in the short term, usually on a yearly basis. In addition to the
traditional modes
of revenue generation, the Internet economy has allowed
organizations to
exploit new revenue streams that are hard to replicate in a brick
and mortar
operation. Following are six such revenue streams.
62 CALIFORNIA MANAGEMENT REVIEW V O L 42, NO. 4
SUMMER 2000
41 •
Business Models f o r Internet-Based E-Commerce: A n A n a t
o m y ^j -
Increased Margins over Brick and Mortar Operations
There are several factors why Internet-based businesses
invariably have
increased margins. As noted, the most prominent are reduced
transaction costs
and reduced customer search costs. Cost reduction can also be
achieved through
dis-intermediation of the supply chain. The classic example of
dis-intermediation
of the supply chain is Amazon.com's offering as much as a 50%

discount on New
York Times best sellers and 30% discount on other titles. The
increase in margins
can be further compounded by an increase in sales turnover. The
cost reduction
attained in this fashion is likely to be partly offset by the
additional costs
incurred in hosting banner ads on other sites in order to funnel
customer atten-
tion into one's own web site. However, it appears that the net
effect of these is
an increase in margins.
Revenue from Online Seller Communities
By providing free membership," market makers can build a
community
of buyers and get access to a host of information about their
interests. Similarly,
by promising an untapped source of buyers, market makers can
also build a
community of suppliers. The suppliers experience a reduction in
customer
search costs by entering into such markets. Once the community
of suppliers
and buyers are in place, the market maker can then build a
revenue stream out
of charging the suppliers a one-time membership fee and a
variable transaction
fee linked to the amount of business performed through the
market maker.
Advertising
Many organizations look towards advertising as the main source
of rev-

enues. Portals (including the search engines) and large business-
to-consumer
and business-to-business community sites such as Yahoo, AOL,
CommerceOne,
and Agriculture Online play a crucial role in funneling the
customers into the
target web sites. It is natural for these web sites to host banner
ads, which gene-
rate huge revenue to support their operations.
Variable Pricing Strategies
Organizations that sell electronically delivered products^" have
unique
characteristics of the information economy to exploit. High
initial cost and
nearly zero marginal cost characterize such information
production and dis-
semination. Therefore, a pricing scheme based on marginal
costs is not applica-
ble for this class of products. However, it is possible to use a
range of alternatives
involving variable pricing and option pricing. Different
consumers have different
valuations for the same product, and thus have a different
willingness to pay. Var-
ian argued that if the willingness to pay is correlated to some
observable charac-
teristics of the consumers such as demographic profile, then it
could be linked to
the pricing strategy.^' Student and educational versions of
software are examples
of this category. Another strategy is the bundling of goods to
sell to a market
with heterogeneous willingness to

SUMMER 2000 63
Revenue Streams Linked to Exploiting Information Asymmetry
As noted, an intermediary exploiting the information asymmetry
between
the buyer and the supplier generates a revenue stream often
linked to the
amount of savings accruing to the buyer. Several variations of
the auction for-
mat are being used in this area.
Free Offerings
The fundamental philosophy behind free services is one of
giving up
today's revenues in return for assured future revenues. The case
of Adobe Sys-
tems giving away Acrobat Reader free exploits this idea. As
more and more users
read documents with Acrobat Reader, they feel the urge to
create documents
using Acrobat and will eventually end up buying the full
version of Acrobat.
Organizations such as Hotmail and Netscape identified several
other rev-
enue streams arising out of giving out free products and
services. When Hotmail
provided free e-mail service, it built a huge online community
of consumers

waiting to be channeled into a multitude of web sites for
products and services.
Such a large community attracts the attention of potential
sellers of products
and services who are willing to pay for advertising. If the
organization decides
to build a community of suppliers, the suppliers will be willing
to pay a member-
ship fee and a variable transaction fee. Sometimes, the free
option results in free
customer feedback and product improvement initiatives. The
success of Netscape
browser and the Linux operating system is attributed to this
phenomenon. Fig-
ure 2 demonstrates the spin-offs effects of free offerings leading
to other revenue
streams.
Logistic Streams for Internet-Based Business
The Internet economy allows an organization to position itself
at an
appropriate level of the supply chain depending on the nature of
its business.
Three distinctive logistical streams exist in the Internet
economy and all three
have evolved out of the need for creating the maximum value
for the customers.
Dis-intermediation is the process by which the logistical stream
is shortened,
leading to better responsiveness and lower costs. On the other
hand, Internet-
based business also calls for new forms of intermediation.
Infomediaries and
meta-mediaries seek to add value to the logistical stream by
addressing certain

problems arising out of information overload and transaction
cost inefficiencies.
Players in the product/service provider market are able to
exploit the dis-inter-
mediation stream for their business model. Portals utilize the
infomediation
stream and market makers utilize the meta-mediation stream.
Dis-intermediation
Due to the nature of certain products and services, the Internet
has
made it possible to shrink the supply chain by a process of dis-
intermediation.
SUMMER 2000
Business Models for Internet-Based E-Commence: A n
Anatonny
F I G U R E 2 . The Spin-Off Effects of Free Offerings for
Revenue Streams
First Mover
Advantage
Faster Feedback, Product
Improvement Initiatives
Assured Revenue
Generating Streams
for the Future

Community of
Consumers
Free Offering
of Product/Service Community of
Sellers
Additional Revenue
Streams (fixed and
variable transaction fee)
Advertising
Revenue
Consequently, transaction costs have been reduced and
responsiveness to cus-
tomer requirements has improved considerably. These
improvements often lead
to price reduction and/or increased margin and sales turnover.
The success of
Amazon.com over Barnes & Noble and that of Encarta over
Encyclopedia Brit-
tanica have adequately demonstrated the benefits of this
logistical stream. In the
business-to-business segment, the success of Dell Computers
and Cisco is largely
attributed to this phenomenon. Similarly, companies selling
information data-
bases consisting of a large number of journals in electronic
form have found
success by bringing down the cost of maintaining libraries.
Infomediation

In the market for information, the number of sources and
suppliers of
information as well as the amount of information is much higher
than a single
information seeker can handle. This is primarily due to a
spectacular growth
of Internet sites. Individual information seekers can not contact
every possible
source of information, nor can they estimate the accuracy and
true value of the
information offered. This has necessitated a crucial role for
intermediaries to
SUMMER 2000 65
Business Models for Internet-Based E-Comnnerce: A n Anatomy
address the information requirements of users. This often
involves storage and
dissemination of meta-information, for example, references to
information con-
cerning a particular topic. Examples of information
intermediaries offering this
meta-information are primarily portals consisting of search
engines and elec-
tronic product catalogue aggregators. Hagel and Rayport argue
that infomedi-
aries act as custodians, agents, and brokers of customer
information and market
it to businesses on customers' behalf while protecting their
privacy at the same

Meta-Mediation
Meta-mediation is a process that goes beyond aggregating
vendors and
products and includes additional services required for
facilitating transactions.
Certain markets in the business-to-business segment are
characterized by frag-
mented supply chains leading to high vendor search costs, high
information
search costs, high product comparison costs, and huge workflow
costs. Under
these conditions, meta-mediation adds value to the buyers,
sellers, and the
intermediary.
Towards an Appropriate Business Model
The alternatives presented here under each stream merely
indicate the
possible options available to an organization. However, the
process of arriving
at an appropriate business model involves choosing the right
mix of alternatives.
The following factors affect the choice of a business model:
• Role in the Market Structure—Organizations can narrow down
their
choices by understanding the role that they play in the Internet
economy.
Table 2 illustrates the alternatives available for organizations in
each mar-
ket structure. For instance, the logistical stream sharply divides
the three
market structures. Similarly, while a market maker can utilize
all the four

value streams, streams such as reducing transaction costs and
exploiting
information asymmetry are not relevant to a portal. Although
the infor-
mation presented in the table is a useful beginning to the
process of arriv-
ing at an appropriate business model, it is abstract and at best
offers broad
guidelines. Within each market structure there are significant
variations
in the activities that organizations perform. For example, Ethan
Allen
(which manufactures and sells furniture) probably cannot
replicate the
dis-intermediation model of Amazon.com (which sells books
and music)
and hope to achieve the same degree of success.
• Physical Attributes of the Goods Traded—Goods traded over
the net can
be either informational goods (soft goods, that can be
transported elec-
tronically) or physical goods (hard goods that need physical
transporta-
tion by a logistics provider). This influences the choice of an
appropriate
revenue stream. Informational goods are characterized by high
initial
costs to produce the first copy and almost no cost to make
additional
SUMMER 2000

T A B L E 2 . Potential Applications of Business Model Streams
for theThree Market Structures
Market Structures
Business Model
Building Blocks
Value Streams
Virtual Communities
Product/Service
Portals Market Makers Providers
Dramatic Reduction
in Transaction Costs
Gainful Exploitation of Information
Asymmetry
Value-Added Market-Making Process
Revenue Streams
Increased Margins over Brick
and Mortar Operations
Revenue from Online Seller
Communities
Advertising
Variable Pricing Strategies

Revenue Streams Linked to
Exploiting Information Asymmetry
Free Offerings
Logistical Streams
Dis-lntermediation
Infomediation
Meta-Mediation
copies. This allows such firms to employ revenue streams such
as variable
pricing strategies, free offerings, and a combination of a one-
time fee and
a variable transaction-based fee. Organizations trading hard
goods often
have to resort to unique options that provides increased margins
and/or
premiums over brick and mortar operations. In the case of
organizations
engaged in providing a variety of services for Internet-based
businesses, it
is possible to employ a combination of the proposed revenue
streams. The
choices with respect to logistical streams are obvious for an
organization
trading soft goods. Such organizations eventually gravitate
towards dis-
intermediation. However, in the case of hard goods there are
other factors
that govern an appropriate choice of the logistical stream.

Personal Involvement Required in Buying/Selling Process—
^The choice of
the logistical stream for hard goods is significantly affected by
this factor.
CALIFORNIA MANAGEMENT REVIEW VOL 42, NO. 4
SUMMER 2000 67
Goods traded over the net broadly fall into two categories:
experience
goods and economy goods. Experience goods require greater
personal
involvement in the buying process. This could be in the form of
making
an assessment of the suitability of the buy by physically
handling and
examining the good to be purchased and participation in the
design of the
product itself by the user. Attributes such as color, texture, and
the expe-
rience of using it on a test basis are crucial determinants of the
buying
decision in business-to-consumer markets. In the case of the
business-to-
business segment, a variety of technical specifications and joint
efforts in
design are sometimes important. Dis-intermediation of the
supply chain is
a risky strategy for such goods. On the other hand, the use of
infomedi-
aries and meta-mediaries greatly enhances the value by
facilitating the

process. Moreover, they can also play a significant role in
reducing search
costs and transaction cost inefficiencies. On the other hand,
economy
goods are ideal candidates for dis-intermediation. The driving
force in this
case is to reduce the costs by eliminating portions of the value
chain that
do not seem to add any value. Many MRO supplies and
commodity goods
traded in the business-to-business segment fall in this category.
Conclusions
The unprecedented growth in Internet-based business in a short
period of
time has underscored the need for understanding the
mechanisms and theoriz-
ing the business models adopted by successful organizations.
The framework
presented here provides a means to understand how business
models are
designed for organizations in the Internet economy and allows
for theory build-
ing. For instance, it is possible to develop several propositions
and constructs
using this framework for further empirical testing. These could
relate to the mar-
ket structure, the three streams, or the specifics of the business
as applicable to
this framework. A deeper empirical understanding of the
relationship between
the market structure and the choice of the business model can be
investigated by
specific case studies.

Notes
In this article we use terms such as "Internet-based business,"
"Internet-based e-
conunerce," and "business over the net" in an interchangeable
fashion. We do not
draw any distinction among them.
A. Barua, J. Pinnell, J. Shutter, and A.B. Whinston, "Measuring
Internet Econ-
omy: An Exploratory Paper," working paper. University of
Texas, Austin, July
1999; http://dsm.bus.utexas.edu/works/articles/internet-
economy.pdf
A. Barua and A.B. Whinston, "Measuring the Internet
Economy," Cisco Systems-
University of Texas report, October 1999. The full report is
available at
http://www.internetindicators.com
SUMMER 2000
4. There is a noticeable trend among portals to evolve into the
market maker struc-
ture over a period of time by partnering with some third-party
service providers.
Such a trend is particularly significant in the business-to-
business segment.
5. Traditionally, a market maker takes possession of goods
allowing people to buy
and sell goods from it. Because it takes possession of goods, it

could also take
positions in these goods, thereby profiting from price
movements. In the defini-
tion used here, a market maker in an Internet context does not
take possession
of goods. Instead, it plays the role of matchmaker and facilitates
the transaction
between the buyer and the seller.
6. E. Schlachter, "Generating Revenues from Websites,"
http://boardwatch.internet.com/mag/95/jul/bwm39.html, July
1995.
7. C.S. Fedwa, "Business Models for Internetpreneurs,"
http://www.gen.com/iess/articles/art4.html, 1996.
8. J. Parkinson, "Retail Models in the Connected Economy:
Emerging Business
Affinities," http://www.ey.com/global/gcr.nsf/us/insights_-
_eBusiness_-
_Ernst_&_Young_LLP, 1999.
9. P. Timmers, "Business Models for Electronic Markets,"
Electronic Markets. 8/2
(1998): 3-8.
10. D.A. Whetten, "What Constitutes a Theoretical
Contribution?" Academy ofManage-
mentReview. 14/4 (1989): 490-495.
11. For a good discussion on the implications of richness and
reach in Internet-based
e-commerce, see P.B. Evans and T.S. Wurster, "Strategy and the
New Economics
of Information," Harvard Business Review, 75/5
(September/October 1997): 70-82.

12. T.M. Siebel and P House, Cyber Rules (New York, NY:
Currency Doubleday, 1999).
13. John Hagel El, "Net Gain: Expanding Markets through
Virtual Communities,"
Journal of Interactive Marketing, 13/2 (1999): 55-65.
14. J.Y. Bakos, "A Strategic Analysis of Electronic Market
Places," MIS Quarterly, 15/3
(1991): 295-310.
15. For a theoretical treatment of the topic, see M.L. Katz and
C. Shapiro, "Network
Externalities, Competition and Compatibility," American
Economic Review, 75
(Spring 1985): 70-83.
16. Y.M. Ioannides, "Market Allocation through Search:
Equilibrium Adjustment and
Vnce DisTpeision," Journal of Economic Theory, 11 (1975):
247-262.
17. K. Chatterjee and L. Samuelson, "Bargaining Under
Incomplete Information,"
Operations Research, 31/5 (1983): 835-851.
18. A detailed case study on this can be found at V. Kasturi
Rangan, "Free Markets
Online," Journal of Interactive Marketing, 13/2 (1999): 49-65.
19. During the early stages of adopting this aspect of the
business model, organiza-
tions were charging a membership fee for the customers.
However, increasingly
organizations have come to realize the importance of providing

free membership.
20. By electronically delivered product we mean all those that
could be downloaded
over the net. These include soft copies of books, electronic
journals and research
reports, software, music, and games.
21. H.R. Varian, "Pricing Information Goods," working paper.
University of California,
Berkeley, in Proceedings of the Research Libraries Group
Symposium on "Scholarship in
the New Information Environment," Harvard Law School, May
2-3, 1995.
22. See, for example, H.R. Varian, "Versioning Information
Goods," working paper.
University of California, Berkeley, 1997.
23. John Hagel HI and J.F. Rayport, "The Coming Batde for
Customer Information,"
Harvard Business Review, 75/1 (January/February 1997): 53-65.
SUMMER 2000 69
1
© 2004, Global Institute of
Flexible Systems Management

e-Strategy Model for Creating Flexible Organizations
Sushil K. Sharma
Department of Information Systems and Operations
Management
Ball State University
Muncie, IN 47306, USA
[email protected]
Jatinder N. D. Gupta
Department of Accounting and Information Systems
The University of Alabama in Huntsville
Huntsville, AL 35899, USA
[email protected]
Abstract
Management literature argues that flexibility in organizations
can enhance corporate responsiveness and can create
competitive
advantages. In the new internet-driven economy, flexibility and
rapid response are the keys to business success. The challenge
is
to structure a leaner, more customer focused and flexible
organization to remain competitive in the global economy,
especially
in e-business. Creating an e-strategy requires comprehensive
knowledge of every aspect of business, from core operational
needs
to competitive forces to technology priorities. So far, research
on flexible organizations has emphasized only the operations
management perspective and not the strategy perspective. This
paper presents a conceptual framework of an e-strategy model
that suggests considering flexibility at all levels. The model
proposes that flexibility has to be considered at external

stakeholders
levels such as customers, partners, competitors and suppliers, as
well as at internal organizational levels that include people,
processes and technology.
Keywords : e-business strategy, e-commerce, e-strategy,
flexibility, IS/IT strategy
[email protected]
Global Journal of
2004, Vol. 5, Nos. 2 & 3, pp 1-9
Framework
Introduction
The major driver in many business domains today is the use
of internet-based technologies to open new market
opportunities, deliver improved services to customers, and
streamline internal business processes. The internet has
profoundly altered today’s business environment by
redefining business processes and changing the dynamics of
relationships with customers, partners, and suppliers (Wargin
and Dobiey, 2001). E-business is defined as the ‘use of
electronic networks and associated technologies to enable,
improve, enhance, transform or invent a business process or
business system to create superior value for current or
potential customers (Sawhney and Zabin, 2001). E-business
is really all about new business models, strategies, and
tactics that are made possible with the capabilities of the
internet and related technologies. E-business is changing the
competitive landscape of virtually every industry (Sharma
and Gupta 2001, Sharma and Gupta 2003a, Sharma and
Gupta 2003b).

In the present phase of e-business, companies and
organizations are moving beyond integrating their various
processes to sense and respond to fluctuating market
conditions in real time (Boulton, Libert and Samek, 2000).
To cope with those changes, business firms have to be
responsive, focused, flexible and resilient. E-business
technologies are a collection of technologies, such as web
sites, browsers, electronic procurement software, desk-top
video conferencing tools, intelligent database search engines,
computer supported co-operative working packages,
and many other technologies, as well as the web-enabling
of more traditional and familiar software such as Enterprise
Resource Planning (ERP) Systems. E-business affects all
aspects of the enterprise: the way new products are
developed; methods of working with suppliers and
distributors; delivery of goods and services to customers;
and so on. However, this makes the choice of a developing
e-business strategy more difficult (Angehrn 1997,
Anonymous 2001, Khoong 2001).
As organizations adapt their business processes and
models to compete in the e-business environment, e-business
strategy is recognized as a critical imperative for success.
Companies like Amazon.com., Dell.com, and Cisco.com
have adopted the right kinds of e-business strategies and
have been dominant players in the e-business market. But
many others who either tried to emulate these companies or
planned their own strategies could not survive. For example,
Compaq didn’t become Dell even when it announced it was
selling direct like Dell. Although every company that offers
e-commerce solutions claims that it has adopted e-business
strategy, recent surveys indicate that many companies
do not have an e-business strategy at all or if they do,
it is not well integrated with business strategy
(Anonymous, 2001).

The key objectives of 21st century organizations are
conducting much of their business online, innovating,
ensuring low cost production, and striving for customer
excellence. Although many organizations have begun
offering products and services online, many of them suffer
2
[email protected]
Today, flexibility is a key factor in business
success. One possible response to the new business
environment is development of a fluid and flexible
conceptual framework (internal structure – People,
processes and Technology) that can respond
quickly to changed circumstances.
Sushil K. Sharma and Jatinder N. D. Gupta
from several typical technology pitfalls: failure to integrate
technology with business strategy, technology not linked
with customer offerings, and services and systems remaining
as fragmented systems, to name a few. To keep organizations
competitive, policy makers will have to overhaul the process
of formulating and implementing strategic initiatives to
explicitly consider flexibility at various levels in the
organization. Many challenges confront companies as they
formulate their organizational strategy to create flexibility
in business processes. Thus, organizations are obliged to
continuously explore new and innovative strategies, and to
seek powerful methodologies that will confer competitive
advantage.
Management literature argues that flexibility in

organizations can enhance corporate responsiveness and
can create competitive
advantages. Creating an
effective e-strategy requires
a comprehensive knowledge
of everything from core
operational needs to
competitive forces to
technology priorities. So far,
research on organizational flexibility has been conducted
mainly from the perspective of operations management only
and not from a strategy perspective (Gupta and Goyal,
1989). This paper presents a conceptual framework of an e-
strategy model that suggests considering flexibility at all
levels. The model proposes that flexibility has to be
considered at external stakeholders levels, such as customers,
partners, competitors and suppliers, as well as at internal
organizational levels that include people, processes and
technology.
Flexibility and e-Business
In Webster’s Dictionary, “flexible” is defined as “a ready
capability to adapt to new, different or changing
requirements.” In a manufacturing context, it can apply to
either production growth and volume increases or to physical
changes in an existing product.
Because of the multitude of choices available to
customers, today, flexibility is a key factor in business
success. Flexible companies are able to respond rapidly to
changes in their markets, and can play an active role in
shaping these changes. Versatility is having the agility and
resilience throughout and beyond the enterprise to create or
maximize market opportunities. Not surprisingly then, it is
suggested that the organizations should offer solutions for

isolating, extending and modifying the business rules that
drive the processes within digital value chain (Porter 2001,
D’souza and Williams 2000). Flexibility is an effective
means by which an e-business can hedge against uncertainty
in a swiftly changing environment. Systems, applications,
and business processes—in short, the entire environment
supporting e-business—must seamlessly adapt to changes
without costly and time-consuming infrastructure overhauls
(Shi and Daniels, 2003).
Becoming flexible is becoming imperative for survival.
There are several dimensions to becoming a flexible
organization including the following: creating a responsive
internal environment that can quickly react to any change
in the marketplace, planned or unforeseen, a threat or an
opportunity. Second, an organization should have variable
cost structures to manage costs in proportion to growth of
the organization or change in demand. Third, an
organization needs to be focused on what is profitable and
core to the enterprise’s success. Finally, the organization
needs to have a resilient infrastructure that is available
around the world and around the clock (Phan, 2001).
The development of multi-capability organizations
requires the rethinking of many underlying assumptions.
Flexibility must be built into facilities, equipment, systems,
people and organizations.
Flexibility is the ability to
respond appropriately to a
wide variety of business
conditions. Financial
viability, human capital and
technical infrastructure are
just a few examples of factors
that will affect the flexibility

of an organization. Flexible organizations mandate that
business processes are integrated end-to-end, enabling it to
respond with flexibility and speed to any customer demand,
market opportunity or external threat (Shi and Daniels 2003,
Sethi and Sethi 1990).
As organizations use real-time information to accelerate
an increasing number of business processes, flexibility and
adaptability become fundamental requirements for supporting
today’s—and tomorrow’s—business imperatives (Davidson,
1999). Agile, cost-effective responses to business and
technology changes differentiate successful companies from
their competition. The ability of organizations to use, adjust,
or redeploy not only technology but also human resources
and capital assets is a cornerstone of business agility. The
flexibility of an organization also comes from its ability to
create custom-quality products in short production runs, on-
demand, inter-spliced with production of other products on
the same production line, at low cost, with high reliability,
and low cycle time. In a flexible business, the production
flexibility itself may be located at any global location
internal or external to the knowledge-source of the
organization. Flexibility is also the ability of an organization
to sense environmental change and respond efficiently and
effectively to that change. By developing an e-strategy
framework, it is possible to measure the state of flexibility
within an organization and identify weaknesses so that the
organization can implement solutions to improve its agility.
e-Business flexibility determines an organization’s ability
to adapt to changes and uncertainties in its business
environment, both internal and external. In addition to
general business flexibility, e-Business flexibility reflects an
organization’s ability to react to those environmental
variables that are particularly associated with information

3
© 2004, Global Institute of
This paper presents a conceptual framework of
e-strategy model that suggests considering
flexibility at all levels. The model proposes that
flexibility has to be considered for external
stakeholders, such as customers, partners,
competitors and suppliers, and internal structure
– People, processes and Technology level.
e-Strategy Model for Creating Flexible Organizations
technologies and new ways of doing business which are
enabled by these technologies. The dramatic and continuing
decrease in the cost of a broad range of technologies (e.g.,
Internet, wireless, and broadband) and the wide use of
standards have created numerous opportunities for
increasing e-business flexibility, thereby changing the basis
of competition. Flexibility is particularly important in an
increasingly volatile business environment characterized by
intense, global competition, short product life cycles,
increased technological innovation, and time-sensitive
customer demand. The focus of competition in global
marketplaces is increasingly shifting from cost, quality, and
service to delivery, flexibility, and innovation (Shi and
Daniels 2003, Gupta and Goyal 1989).
Organizations need an appropriate e-strategy framework
to gain competitive advantage (Sabherwal and Chan, 2001).
The increasing pace of change in market conditions places

a premium on building flexible organizations in the business
world. Organizations have to respond by creating fluid and
flexible internal structure that
can respond quickly to
changed circumstances
(Kumar, 1987). Old strategies
will no longer work in
changed circumstances.
Organizations need an e-
strategy framework to counter
new competition and help
create a business strategy that
can create flexibility. Criteria
for an e- strategy should flow directly from the shared vision
(organization’s business and strategic plans) and should be
linked to entire value chain (Galliers 1999, Haapaniemi
2001).
e-Strategy Model
A comprehensive e-strategy is central to the success of an
e-transformation of the enterprise. e-Business takes into
consideration the entire set of transactions occurring in a
business including strategic and operational decisions.
Hence, thinking about the enterprise from the e-business
perspective requires radical thinking of how business is
conducted at present and in the future across the enterprise
and beyond. e-Business strategy is not an extension of an
internet strategy or an IT strategy in an enterprise. In fact,
it should flow from the company’s overall business strategy
and should be necessarily linked to company’s vision,
objectives and goals. No matter the size of the organization
and the scope of its business, an e-business plan should be
all-inclusive taking into consideration all stakeholders, core
competencies and core entities of the enterprise.
Development of such a strategy necessitates a framework that

integrates customers, suppliers, enterprise and trading
partners (Dutta 1996, Dutta, Kwan and Segev 1998).
The key to e-strategy is finding the balance between
flexibility (how easily and quickly people can change to
meet the business need) and speed to market (how quickly
business practices and technology solutions can change).
Also, when considering an e-business strategy, one must
consider the entire supply chain of business – from
interaction with customers and end users, production and
fulfillment, through to interaction with suppliers (Lapierre,
Filitrault and Chebat 1999, Leidner 1999). The e-strategy
model is derived from the work of IBM’s Process-
Technology-People (P-T-P) Model (Sharpe, 1989) and the
Kanungo (2003) e-strategy framework. An e-strategy of an
organization is essentially the organizational strategy to
strengthen operation in digital space. It is different from an
e-commerce strategy in the sense that while an e-commerce
strategy encompasses suppliers, channel partners and
customers, an e-strategy includes employees as well besides
the other components of an e-commerce strategy. e-Strategy
can also be termed as e-organization strategy, which
encompasses e-business and e-employee. An e-business
Strategy is “electronic” in the sense that it is based on the
exploitation of information available in electronic form and
the corresponding technology (Kanungo, 2003). Kanungo’s
model (2003) emphasizes
that e-strategy model must
consider both the external
and internal environment of
an organization. While the
external environment consists
of suppliers, channel partners,
customers and competitors,

the internal environment
consists of internal processes,
organizational culture, beliefs and values, norms and its
employees.
The P-T-P model of IBM consists of employees (people),
activities that those employees perform (processes), and tools
that help them perform those activities (technology). It
further suggests that an effective e-strategy model for an
organization requires flexibility to be built in the enterprise
architecture at the people, processes, and technology level
(Sharpe, 1989). People need to be knowledgeable about the
technologies they operate and operational procedures. It is
very important to have people who are ready to learn on a
continuous basis and adapt to the changing environment.
Processes build on the notion that all organizations have
some form of operational practices and procedures. The new
e-business environment depends upon organizations’ ability
to adapt to a new, more collaborative, competition model.
To become flexible, organizations have to shift from being
product-centric to customer-centric, making customers a part
of the organization. Companies cannot continue to compete
in today’s frenetic environment with disparate, disconnected
IT infrastructures and disintegrated processes or applications.
The organization’s management must understand that new
technologies and business models that change industry
dynamics and redefine what both shareholders value and
customers desire will also change their business processes.
To prepare for that, an organization should work on an
operating philosophy that includes changing business
processes and business models. Technology; e-business
4

[email protected]
Many challenges await companies as they
formulate their organizational strategy and
create flexibility in business processes.
enabling technologies infrastructure should be flexible,
reliable, scalable and quickly deployed to keep up with the
ever-changing, unpredictable advances in technology
(Hackbarth and Kettinger, 2000). Customers will expect
businesses to serve them via the internet, anytime, anywhere
in the world, on any device, at any time. Therefore, it
becomes mandatory to create web-based infrastructure that
can integrate back-office management systems, customers
and business partners to respond to any situation. Properly
designed web portals can provide trusted business partners
with a secure, flexible environment for activities ranging
from self-service to collaborative commerce (Budhwani,
2001).
The proposed e-strategy model is shown in Figure 1. The
model indicates that at the bottom most layer, creating
flexibility requires enabling e-business technologies. Once
the enabling technologies are flexible enough to quickly
adapt to a changing market environment, it is important to
create flexibility in core processes. The second level of
flexibility has to be at the core processes. e-Strategy for
creating flexible organization
would also demand the workforce
to be flexible. Researchers have
argued in favor of integrated
strategies for digital space
(Jarvenpaa and Tiller, 2000). They argue that an e-business
strategy model should be integrating various strategies, such
as marketing, manufacturing, supply chain and financial
strategy. Therefore, all strategies that need to be integrated

should flow from shared vision (or view of the firm).
Kanungo (2003) contends that e-strategy must link with the
four components of business (customers, suppliers, partners
and competitors) because these components influence
business strategy. Issues related to suppliers, channel partners
and customers are less technological issues than business.
For example, issues like how the purchase process would
be managed, what level of integration with suppliers and
distributors would be achieved or which products or services
would be offered to customers and how, appear to be
business oriented than technology oriented. Technology is
only a medium or at best serves as a link to maintain these
relationships in virtual space (Kanungo 2003, Hackbarth and
Kettinger 2000). The details of each layer are described
below.
Flexible Technology Infrastructure
In order to provide the flexibility, scalability and reliability
required of e-business, companies need to create a flexible
e-business infrastructure. This infrastructure should consist
of open interfaces that allow new applications and services
to easily connect. The flexible e-business infrastructure
should include; universal connectivity through the use of
open standards, and integration with internal and external
services. Universal connectivity
through the use of open standards
implies that companies must
allow customers, business
partners, suppliers, and
influencers to have access to
systems and applications with a variety of access devices
available. Having interoperability to allow sharing or

communicating with mixed technologies across and beyond
the enterprise is an important success factor in e-business.
e-Business infrastructure should have capability to integrate
internal and external services seamlessly. By integrating
business applications and data among customers, suppliers,
partners and employees, companies can achieve a more
effective and efficient e-business model. Enabling
integration is accomplished by using open standards-based
infrastructure elements in conjunction with an integration,
which allows existing application functionality to be
integrated with the new application logic (Shi and Daniels,
2003). In today’s e-business on demand environment,
integrating information across and beyond the enterprise is
a competitive mandate. Initiatives such as customer
relationship management, supply chain management and
business intelligence are based on successfully integrating
information from multiple data sources, both structured and
unstructured. Information integration technology enables
integrated, real-time access to traditional and emerging data
sources, transforms information to meet the needs of
business analysts and manages data placement for
performance, currency and availability. This, in turn, leads
to fast, constant and easy access for customer facing
e-business solutions.
Capability to collaborate in the value network resource
reconfiguration – sharing data with suppliers, customers, and
partners in a value network through XML standards is
merely a first step. For the foreseeable future, businesses will
have to support multiple points of integration and multiple
points of interaction. The organizations must integrateFigure 1 :
An e-strategy Model for Flexibility
Sushil K. Sharma and Jatinder N. D. Gupta

The Digital TransformationNew information technologies,s.docx

The Digital TransformationNew information technologies,s.docx

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