Transcript Crafting the Network Economy Business Model

Crafting the Network Economy
Business Model

Some of the best innovations involve a paradigm shift, a real
mental change of assumptions and certainties. In fact, the
process of innovating and entrepreneuring is much less about
invention or new ideas. It’s much more about rethinking and
questioning the assumptions people already make… The ability
to rethink fundamental assumptions and take what people
accept as certain and question it [is the central] talent of being
an entrepreneur.


Scott Cook, Founder of Intuit Inc.
If there is one lesson we can learn from continuing evolution of
work and competition in the new economy, it’s this … Change
the question and you change the game…

Slywotsky and Morrison, Profit patterns (NY Times Business,
1999)
Crafting the Network Economy
Business Model
 Old economy question
 What business am I in?
 New network economy question
 What is my business model?
 Emerging networked technology enable us to
create new business model and redefine
existing ones.
 IT can provide flexible channel for procuring and
distributing products and services
 As well as the tools to create and package content in
all its many forms
 Data, voice, video
Crafting the Network Economy
Business Model
Concept
describes the
opportunity and
strategy
Value
Measures the
benefits to
investors and
other
stakeholders
Capabilities
define resources
needed to
execute strategy
Crafting the Network Economy
Business Model
Classifying the Business Models
 Producers
 Design and build products and services that customer
or market needs
 May sell, service, and support the product
 Distributors
 Enable buyers and sellers to connect, communicate,
and transact business.
 May assume control of inventory and resell a product,
solution or service (retailers, wholesalers).
 May simply act as agents, connecting buyers and
suppliers but no assuming control of inventory
(aggregators, marketplaces, and exchanges).
Classifying the Business Models
Classifying the Business Models
 Business Built on Networked Infrastructure
 Focused distributors
 Portals
 Producers
 Business That provide networked
Infrastructure
 Infrastructure distributor
 Infrastructure Portals
 Infrastructure Producers
Business Built on a Networked
Infrastructure
 Focus Distributor
 Provide products and services related to
a specific industry or market niche
 E.g. InsWeb and E-Loan as focused
distributors offering products and services
within the financial services industry.
 Staples.com was a focused distributor for
office products and suppliers.
Classifying the Business Models
 Five type of focused distributors
business model





Retailer
Marketplace
Aggregator
Exchange
Infomediaries
Classifying the Business Models
 These five types can differentiated by
asking the following questions
 Does the business assume control of
inventory?
 Does the business sell online?
 Is the price set outside the market, or is
online price negotiation and bidding
permitted?
 Is there a physical product or service
that must be distributed?
Classifying the Business Models
 Focus Distributors: Retailers
 E.g. ToysRus and Staples.com
 Assume control of inventory, set a
nonnegotiable price to the consumer, and
sell physical products online.
 The primary revenue model is based on
product/service sales,
 The cost model includes procurement,
inventory management, order fulfillment,
and customer service.
Classifying the Business Models
 Focus Distributors: Marketplaces
 E.g. E-Loan and InsWeb
 Sell products and services but do not take
control of the physical inventory.
 Sell products with a nonnegotiable price and
complete sales online.
 The revenue model is based on a commission or
transaction fee for sale.
 Usually e-link to supplier databases and
transaction systems to ensure that transactions
can be completed and revenue can be
recognized.
Classifying the Business Models
 Focus Distributors: Aggregators
 E.g. Autoweb
 Provide information on products or services
for sale by others in the channel.
 Allow a comparison of features and pricing
but do not enable buyers and sellers to
complete the final transaction
 The revenue model is based on referral fees
and advertising
Classifying the Business Models
 Focus Distributors: Infomediaries
 Internet Securities
 Special type of aggregators that unites
sellers and buyers of information-based
products, such as news, weather, sports,
and financial information.
 Transaction can be completed online
because no physical product is involved
 Revenue model include subscription fee,
advertising
Classifying the Business Models
 Focus Distributors: Exchanges
 eBay and FreeMarket
 May or may not take control of inventory
 May not complete the final sales transaction online
 The key differentiating feature of this model is that the
price is not set; it is negotiated by the buyer and the
seller at the time of the sale.
 The revenue, cost, and asset models vary depending on
weather the online exchange assumes control of
inventory and completes the transaction.
 B2B auction exchanges such as FreeMarket charge
transaction fees and supplement revenues with fees for
consulting services.
 B2C and C2C exchanges often supplement transactions
revenues with advertising revenues
Focused Distributor Business Models
Models and
Examples
Own
Inventory
Sell
Online
Price
set
Online
Physical
product
or service
Likely
Revenues
Likely costs
Retailer
ToysRus.com
Staples.com
Yes
Yes
No
Yes
Product/service
sales
Advertising and marketing;
physical facilities; inventory
and customer services;
R&D; IT infrastructure
Marketplace
Eloan.com
nsweb.com
Possible
Yes
No
No
Transaction fees;
service fees;
commissions
Advertising and marketing;
R&D; IT infrastructure
Aggregator
Internet
Securities
No
No
No
Possibly
Referral fees;
advertising and
marketing fees
Advertising and marketing;
R&D; IT infrastructure
Exchange
ebay.com
freemarket.com
Possibly
Possibly
Yes
Possibly
Depends on
model
Advertising and marketing;
staff support for auctions
(especially B2B)R&D; IT
infrastructure; inventory
control; R&D; technical
infrastructure.
Focused Distributor Business
Models Trends
 Focused distributors that do not allow customers and
business community to transact business online are
losing power
 Aggregators are evolving into marketplaces and/or
vertical portals
 Multiple business models are required to ensure
flexible and sustainability
 Focused distributors are aligning closely with vertical
and horizontal portals or are evolving their model to
become vertical portals
Classifying the Business Models
 Portals
 “Door way”
 Early Pre-Internet Portals
 American Hospital Supply’s ASAP
 AA Sabre
 Online consumer portals
 America Online
 CompuServe
Classifying the Business Models
 Types of Portals
 Horizontal
 Vertical
 Affinity
Classifying the Business Models
 The different types of portal can be differentiated by:
 Does the business provide gateway access to a full
range of online information and services, including
search, calendar, e-mail, instant messaging, chat,
and other community-building tools
 Does the business provide access to deep content,
products, and services within a vertical industry (e.g.
financial services, travel, etc.)
 Does the business provide information and services
for all types of users, or are information and services
specific to a well-defined affiliation group (e.g.
women, people selling or buying a home)
Classifying the Business Models
 Horizontal Portals
 Aol.com , Yahoo and Quicken.com
 Provide gateway access to the Internet’s vast store of
content and services.
 Provide a broad range of tools for locating information
and websites, communicating with others, and
developing online communities of interest.
 Revenue models



Advertising
Transaction fee from multiple vertical solutions channels.
Strategic alliances with dial-up and broadband Internet
service providers (ISP)
 Cost includes development, maintenance, and operation
of infrastructure and content
Classifying the Business Models
 Vertical Portals
 E.g. Covisint and WebMD
 Provide deep content: a place to conduct
business, learn, and shop; communicates and
community-building tools
 Often composed of a variety of business
models, all of which generate separate revenue
streams.
 Advertising and referral fees if transactions are not
completed online
 Service fees and transaction fees may be generated
if transactions are completed online
 Subscription fees may also be generated for unique
content
Classifying the Business Models
 Affinity Portals
 iVillage.com and Realtor.com
 Provide deep content, commerce, and
community features such as those found in
vertical portal but these offerings are
targeted toward a specific market segment.
 Some towards a specific gender
 The revenue model is similar to vertical
portals, cost, and asset models are based
on business model adopted by the portal
Portal Business Models
Models and
Examples
Gateway
Access
Deep
Content
and
Solutions
Affinity
Group
Focus
Likely
Revenues
Likely costs
Horizontal Portal
AOL.com
Yahoo.com
Quicken.com
Small business
Yes
Possibly;
often
through
partnership
with vertical
and affinity
portals
Possibly;
often
partnersh
ips
Advertising,
affiliations and
slotting fees;
possibly
subscription or
access fees
Advertising, marketing and
sales; content/information asset
management; R&D; IT
infrastructure
Vertical Portal
WebMD.com
Covisint.com
Limited
Yes
No
Transaction
fees;
commissions;
advertising,
affiliation and
slotting fees
Advertising, marketing and
sales; content/information asset
management; R&D; IT
infrastructure; legacy system
integration to support
transactions
Affinity Portals
Realtor.com
iVillage.com
Possibly
Focused on
affinity
group
Yes
Referral fees;
advertising and
slotting fees
Advertising, marketing and
sales; content/information asset
management; R&D; IT
infrastructure
Portal Business Model Trends

Horizontal and vertical portals are emerging as dominant
sources of power within consumer and business markets

Horizontal portals are joining forces with horizontal
infrastructure portals to provide not just access to content
and services but also access to network and hosting
services

Large media and entertainment portals that represent the
convergence of data, telephone, television, and radio
networks are emerging in the consumer space.


These portals unite content development, packaging, and
distribution components of the value chain
B2B portals provide both horizontal access to business
networks and vertical industry-wide solutions
Classifying the Business Models
 Producers

Producers design and make also may directly market, sell,
and distribute products, services, and solutions.

Producers held the position of power in the traditional
business market

In contrast, the Internet and associated networked
technologies of the Network Economy create wealth by
connecting buyers and suppliers.

Many believed that distributors would become the dominant
players in the Network Economy.
 Gaining control of the distribution channel is a key success
factor in the today
 Producers are also thinking of taking steps to recapture
the position of power by forming coalitions with
distributors

Covisint in the automobile industry and Global Healthcare
Exchange in the health-care industry.
Classifying the Business Models
 Six categories of producers business
model






Manufacturer
Service provider
Educator
Adviser
Information and new service
Producer portal
Classifying the Business Models
 Differentiating between producers
 Does the business sell physical products
and/or provide face-to-face services
 Does the business sell information-based
products and/or services
 Does the business provide customized
products and/or services
Producer Business Model
 Manufacturer
 Ford Motor Company and Procter & Gamble
 Design, produce and distribute physical
products, components and parts
 The Internet and associated networked
technologies has been used to streamline,
integrate, coordinate, and control physical
channels of production and distribution.
 Often these IT-enabled process redesign efforts
often begin inside the organization and extend
to connect customers, suppliers, and partners.
Producer Business Model
 Service Providers
 American Express and Singapore Airlines
 Offer a wide range of services offerings that may be
delivered through multiple channels.
 Like manufactures of physical producer, service
providers that offers physical services (e.g. car rental
agencies, restaurants, etc.) often use it to streamline,
integrate, coordinate, and control service delivery and
to connect and share information with customers,
suppliers, and partners.
 Service providers that offers primarily informationbased services (e.g. financial services) can use IT to
digitize service delivery.
Producer Business Model
 Educator
 DePaul, Harvard, and Virtual Universities
 Create and deliver online educational programs,
products, and services.
 The ability to use the Internet and associate
technologies to define new multimedia educational
offerings and to customize those offerings to meet of
individual and businesses is revolutionizing
education.
 Distance will never replace face-to-face class room
education offerings.
Producer Business Model
 Advisers
 McKinsey and Accenture
 Consulting and coaching services to business
and individuals.
 Use online to extend the nature of the
relationship with customers from a one-time
consulting project to an ongoing education and
advisory service.
 Online channels can used to disseminate
knowledge, connect consultants with their
clients, and create communities of interest.
Producer Business Model
 Information and News Services
 Dow Jones and Euromoney
 Create packages and deliver information
through both online and offline channels and
across multiple media formats
 Because information in all its many forms can
be digitized, stored, and delivered to meet
personalized needs, we convergence among
polishing, television, radio, and information
industries.
Producer Business Model
 Producer Portal
 Covisint and Global Healthcare Exchange
 Use the Internet and associated
technologies to support all aspects of the
production and distribution process
Portal Business Models
Models and
Examples
Sale
Physical
Product/
Services
Sale
Information
-based
Product/
Services
Level of
customi
zation
Likely
Revenues
Likely costs
Manufacturers
Ford Motor
Company
Procter & Gamble
Yes
Possibly
Low to
moderate
Product sales;
services
Advertising, marketing and
sales; content/information asset
management; R&D; IT
infrastructure
Service Providers
American Express
Singapore Airlines
Yes
Possibly
Moderate
to high
Commissions,
service, or
transaction
fees
Advertising, marketing and
sales; content/information asset
management; R&D; IT
infrastructure
Educator
DePaul.edu
Harvard.edu
Possibly
Possibly
Moderate
to high
Registration or
event fee;
subscription
fee; hosting fee
Content/information asset
management; R&D; IT
infrastructure
Portal Business Models
Model differentiators
Models and
Examples
Sale
Physical
Product/
Services
Sale
Information
-based
Product/
Services
Level of
customi
zation
Likely
Revenues
Likely costs
Information and
news Services
Dow Jones
Euromoney
Yes
Yes
Moderate
to high
Subscription
fee; transaction
fee; or service
fee
Advertising, marketing and
sales; content/information asset
management; R&D; IT
infrastructure
Producer Portal
Covisint
Global Healthcare
Exchange
Possibly
Yes
High
Service or
transaction fee;
membership
fee; Consulting
and integration
fee; hosting fee
Content/information asset
management; R&D; IT
infrastructure; software
development logistics
Producer Business Model Trends

Producers must be best in class – the number one or two
brand – to survive

Some large full-service producers, such as American
Express and Citigroup in the financial services industry and
AOL Time Warner in the entertainment and media industry,
are acquiring a full range of products and services and then
integrating them to provide vertical solutions required by
customers.


This solutions are offered through company-owned portals and
also through a wide variety of distribution agreements.
Industry supplier coalitions are forming to enable virtually
integrated B2B commerce within and across industry groups
Businesses that Provide Networked
Infrastructure
 Until recently, there was a distinct
separation between businesses that were
built using IT and those developing and
selling IT.
 “Charles Schwab is a technology company that
just happens to be in the brokerage business.
Everything we think about as we run our
business has technology in the center of it with
the goal of engineering cost down and service
up…”
David Pottruck co-CEO of Charles Schwab