CHAPTER 4

COMPONENTS OF A BUSINESS MODELCOMPONENTS OF A BUSINESS MODEL

1. We will discuss the components of an Internet business model &

2. the linkages between its components

CHAPTER 4

COMPONENTS & LINKAGES

BUSINESS MODEL

PROFIT SITE

PRICE

SCOPE

CUSTOMER VALUE

REVENUE SOURCE

CAPABILITIES

IMPLEMENTATION

CONNECTED ACTIVITIES

SUSTAINABILITY

COST STRUCTURE

1.DIFFERENTIATION

2.LOW COST

1.MARKET SHARE

2.GROWTH

3.TYPES OF PRICING

MENU ONE-TO-ONE

AUCTION

REVERSE AUCTION

BARTER

PRODUCT FEATURESTIMING

LOCATIONS

SERVICE

PRODUCT MIX

REPUTATION

1.ACTIVITIESTO PERFORM

2.WHEN TOPERFORM1.STRUCTURE,SYSTEMSPEOPLE

1.BLOCK STRATEGY

2.RUN STRATEGY

3.TEAM-UP STRATEGY

1.RESOURCES2.COMPETENCIES3.COMPETITIVE ADVANTAGE

COMPONENTS & LINKAGES

Rationale for Components• To make money ,a firm must offer its

customers something the customers value & the competitors cannot offer

• Must find ways to retain its competitive advantage

BUSINESS MODEL COMPONENTS

1. PROFIT SITE2. CUSTOMER VALUE3. SCOPE4. PRICE5. REVENUE SOURCES6. CONNECTED ACTIVITIES7. IMPLEMENTATION8. CAPABILITIES9. SUSTAINABILITY10. COST STRUCTURE

PROFIT SITE

• It’s a location in a value configuration• Determines the competitive pressures from

rivals, suppliers, customers, potential new entrants, complementors & substitutes

• Attractive or useful if demands used by competitive forces is low

Chapter 2. pg 19 table 2.1

1.e-commerce2.Content aggregators3. Brokers agents4. market-makers5. Service provider6.Backbone operators.7.isp/osps

CUSTOMER VALUE

• Customers buy product from a firm only if the product offers them something that competitor’s products do not.

1. Differentiation2. Low cost products/services

1. Differentiation

• Differentiation= customers think ““it has something of a it has something of a value that other products don’t have”value that other products don’t have”..

* 7 different ways can differentiate a product:

1. Product features2. Timing3. Location4. Service5. Product mix6. Linkage between functions /Linkage with other firm7. Reputation

1.Product features– Offer features that competitor’s products do

not have– E.g. emphasize the speed of a chip for a

microprocessor manufacturer– Customization of an internet website– Localization of services & product offers

2.Timing–Be the first to introduce the product

3. Location– Products with identical features can still be

differentiated by virtue of their location– How?– E.g. ease of access to the product– ISP example Michigan VS New York– Service of both are different

4. Service– How fast is the response of a product be attained by

its sellers– E.g. after sales service of a certain product after it is

broken

5. Product Mix– One stop shopping for variety of goods are

convenient for customers– E.g. Amazon. COM=16million items for sell– Use data to personalized their presentation of the

store

6. Linkages– Association with another firm– Larger web community– E.g.

7.Brand name Reputation– Branding is always a winner– Internet offers a no other channel to established

brand name reputations– Branding can be world wide, internet reaches more

people

2. Low cost products/services

• Firm’s product & services cost customers less than those of its competitors

• Cost less for the firm to offer the customers of the product & services-the cost saving were passed on to the customers

• Sell on the internet saves operating cost, distribution cost & transportation cost

• Better coordination of activities = lower cost for producers

BUSINESS MODEL COMPONENTS

1. PROFIT SITE2. CUSTOMER VALUE3. SCOPE4. PRICE5. REVENUE SOURCES6. CONNECTED ACTIVITIES7. IMPLEMENTATION8. CAPABILITIES9. SUSTAINABILITY10. COST STRUCTURE

SCOPE

• Market segments or geographic areas to which the value should be offered

• How much of the needs of the segment that it can make profit

• E.g. a firm must decide how much demand of its teens segment needed that the firm needs to fulfill

• Universality of the internet breaks the scope barrier.

PRICE

• Price your value properly/accurately to gain profit

• Must have pricing strategy to avoid killing a product

• We are in a “knowledge based economy”• Our product must provide complete information

before entering the market

( Price e.g.) *To illustrate basis of pricing strategies for “knowledge based” products &

services: p.g 58 text book.

PROFITS = ( P - V )Q – F

P price per Unit of the Product

V price per Unit Variable Cost

Q total number unit sold

F fixed cost

C C

C

C

*To illustrate basis of pricing strategies for “knowledge based” products & services: p.g 58 text book.

FIRM A

FRIM B

R & D (Fixed Cost)

$500 million

$500 million

Variable Cost

$5

$5

Price per Unit

$200

$200

Market Share80%

Market Share20%

Knowledge based- software – IT - content

Market Share & margin are important!!

• Firm with more market share make more profit for that year

• Controlling of market share , involves in the early of introducing the product example

• Giving away product C but charging product D• Pricing low to penetrate the market

Example: NetscapeGiving away for free the browser Netscape, but charging corporate

customers for its servers

Example: Most software companies

Sells cheap software

Growth are Revenues

• Develop the market• Sell more units, you will increase the market

Types of Pricing & the Influence of the Internet

• MENU: Fixed pricing, seller sets price buyer buys it or leave it

• ONE-TO-ONE: seller negotiates which price both accepts-

• AUCTION: seller solicits bids from many buyer& sells to the highest bidder

• RESERVE AUCTION: seller decides order of potential buyer

• BARTER: swapping of goods for goods

REVENUE SOURCES

• Revenue sources: from products sold• Critical part in business model analysis• E.g. online stockbrokerage firm gain revenue

sources from 3 areas:1. Sales commission2. Interest charge to clients3. Spread of bid & ask price of stock

CONNECTED ACTIVITIES

• To offer outstanding products & charge premium price to the customers, a firm must perform connected activities for the basis of producing the product

• Choose which activity to perform & when to perform it

Which activity to perform

• The activities should be consistent with the value that the firm offering

• Take advantage of industry success drivers• Consistent with any capabilities that firm wants

to build• Make industry more attractive for the firm

When to perform activities

• What are the characteristics of the industry at that stage of the life cycle & what will they be down the line

• What are existing competitors doing & what are potential ones likely do

• Are the activities consistence?

IMPLEMENTATION

• Means ‘carrying out’/executing/performing the decision

• The role of implementation, the relationship between

1.structure

2.systems

3.people

1. structure

• Who is supposed to report to whom & who is responsible for what so that the task in that organization are carried outFunctional organizational Structure•People are grouped & perform their task according to traditional functions•Enable to learn from each other

Project Organizational structure•People are organized not by functional area

2. systems

• How to keep people motivated as they carried out their task & responsibilities

• Management must monitor performance & reward & punish individuals, workers, ect

• Incentives, ideas, comments ect

3. people

• To what extent do employees share a common goal?

• Money, recognition, ideas, seeing as a person…does all this matter.

• Organizational culture• Kaizen• The ‘F$%&’ you attitude ect.• UMS corporate culture?

CAPABILITIES

1. RESOURCES2. COMPETENCIES3. COMPETITIVE ADVANTAGE

Assets under financial statementTangible- plants, equipment, cash reserves, PC, serversIntangible- patents, copyrights, reputation, brands, programmers.

Ability of firm to turn its resources to a customer values & profits.Integration of more than one resources.e.g. APPLE experience.

Core competencies: firm able to offer better value than other competitors.Advantage to the firm.Honda offers outstanding engines.

SUSTAINABILITY

• The ability of the firm to sustain its competitive advantage from its competitor.

• How the firm uses its resources & strategies to stop competitors from gaining market share.

• Uses 3 strategies:1. Block strategy2. Run strategy3. Team-Up strategy

Sustainability strategies

BLOCK STRATEGY -Firm puts barriers around its product market space. -Uses Intellectual properties rights. -This strategy works only if, company has unique capabilities - Easier in the internet era uses reverse engineering.

RUN STRATEGY -Thinks that blocking strategy fails. therefore, this strategy must change some of its components & linkages /b-model or maybe sometimes create a new business model to offer customer better value. -Gives first mover advantage -Example DELL

TEAM-UP STRATEGY -If you can’t beat em’.Join em’ -nothing else works. -thro’ strategic alliances, joint venture acquisition, equity position. -allows sharing of resources it does have. - promotes knowledge transfer -creates ‘win-win situation’

COST STRUCTURE

• All process of executing business plan cost money.

• Cost structure expresses the relationship between its revenues & the underlying cost of generating those revenues

• To keep cost low firm must first determine its cost/identify its cost.

• Lower its cost drivers.• Book example pg 73