Internet Business Strategies and

1. Internet Business Strategies and Business Models CSI 5389

2. Outline • The Internet Value Proposition • Four Strategies • New Competitive Threats • New Competitive Opportunities • Business Models CSI 5389

3. The Internet Value Proposition • Internet commerce must start with a strategy, and the analysis of the strategy starts with value. What are the sources of Internet value? • It is believed that the ability of the Internet to change the landscape of commerce comes from 2 key ideas: • The Internet can be used to transform customer relationships, and • The Internet can displace or alter traditional sources of business value. • These 2 ideas lead to 4 basic strategies for businesses to consider both in exploiting the Internet and in defending themselves against competitors. CSI 5389

4. The Internet Value Proposition (cont.) • Transforming Customer Relationships: • By exploiting the Internet, traditional commerce evolves from being supplier-centered to being customer-centered. • This leads to two business strategies: • A customer-centered business organized around a product (called Channel Master strategy), or • A customer-centered business organized around meeting the needs of a group of customers (called Customer Magnet strategy). CSI 5389

5. The Internet Value Proposition (cont.) • Displacing/altering traditional sources of business value. • The Internet moves commerce from the physical world to the information world. • A focus on the supply chain leads to the Value Chain Pirate strategy. • A focus on distribution – reaching the customer – leads to the Digital Distributor strategy. CSI 5389

6. Four Internet Business Strategies • Channel Master • Customer Magnet • Value Chain Pirate • Digital Distributor CSI 5389

7. Channel Master • The channel master strategy works by using the Internet to build deeper customer relationships in order to sell traditional goods or services. • This strategy is organized around products, concentrating on the best possible delivery of those products and their related services. • A company using the channel master strategy must re-engineer all its customer-facing activities. • In other words, the company must integrate the commerce value chain with their existing operations CSI 5389

8. Example of Channel Master: Cisco Systems • Cisco Systems is an $18 billion provider of Internet software, hardware and services. It uses its Web site as the primary sales channel to its customers and partners. • Attract (get and keep customer interest): • Full online catalog • Demonstration of ordering process • Customers are notified of price changes • Interact (turn interest into orders): • The online catalog enables searching, browsing, and configuration of purchases. • Intelligent agents suggest alternatives (such as software upgrades) and identify errors. CSI 5389

9. Example of Channel Master: Cisco Systems (cont.) • Act (coordinate order fulfillment): • Orders link to procurement and order management databases. • Customers can monitor or receive notifications about order status. • React (provide after-sales service): • Customers can access comprehensive documentation and self-help intelligent agents. • A Bug Alert mechanism automatically notifies customers of bugs. • Results: • 70% of all product support is delivered through the Internet. • Large fraction of orders arrive through the Internet channel. CSI 5389

10. Customer Magnet • The customer magnet strategy works by using the Internet to attract a group of customers by meeting their needs with a knowledge sharing environment and aggregated supplier access. • This strategy is organized around a group of customers, delivering a broad range of products and services to these customers. • A company using the customer magnet strategy seeks to be the destination of choice for a whole category of customers. • A customer magnet must integrate the value chains of multiple suppliers into one customer-facing whole. CSI 5389

11. Example of Customer Magnet: Yahoo • Yahoo tries to be the first place for people to visit when they go online. • In addition to providing information, Yahoo offers free services such as e-mail, instant messenger, and Web sites (via GeoCities). • Attract (get and keep customer interest): • Yahoo offers tremendous amount of free information and links to other sites. • Members can participate in discussion groups, real time conferences on many topics, and can set up new ones via Yahoo Clubs. • Interact (turn interest into orders): • Yahoo operates Yahoo Shopping, which offers retail shopping, warehouse shopping, auctions, and classified ads. CSI 5389

12. Example of Customer Magnet: Yahoo (cont.) • Act (coordinate order fulfillment): • Yahoo shops offer the usual array of delivery options. • Yahoo also offers the ability to set up and operate a new shop within Yahoo Shopping • React (provide after-sales service): • Although many Yahoo shops are operated by other businesses, Yahoo has offered a uniform level of after-sales service through a buyer protection program that covers all Yahoo shops. CSI 5389

13. Value Chain Pirate • The value chain pirate strategy works by capturing someone’s margins and displacing them from their value chains. • This strategy is organized around the value chain, seeking to connect suppliers with customers more directly. • A business using the value chain pirate strategy seeks the positions on the value chain that offer the greatest leverage. CSI 5389

14. Example of Value Chain Pirate: Autoweb • Autoweb displaces part of the value chain of car dealerships by selling cars directly to consumers (with the actual delivery handled by a traditional dealer). • Attract (get and keep customer interest): • Autoweb offers no-haggle service backed by extensive online information about cars and options. • Interact (turn interest into orders): • Autoweb has complete information about cars, options, and colors available. • Customers can accurately request a quote for the vehicle of their choice. CSI 5389

15. Example of Value Chain Pirate: Autoweb (cont.) • Act (coordinate order fulfillment): • Autoweb uses traditional dealerships for delivery and service. • It has partnerships with other companies to provide insurance and financing. • React (provide after-sales service): • Autoweb provides extensive information on warranty issues, insurance, recalls, repairs, and maintenance. CSI 5389

16. Digital Distributor • The digital distributor strategy works by focusing on pieces of value that can be delivered better through the Internet. • A company using this strategy is organized around disaggregating traditional bundles of products and re-aggregating products and services that can be delivered efficiently through the Internet. CSI 5389

17. Example of Digital Distributor: Monster.com • Monster.com began by offering online employment advertising for high-technology jobs. • As the Internet has become a cross section of global society, Monster.com has added job listings spanning all industries and has built a global network of national services. • It has also aggregated other services related to career management, such as resume listings, moving, real estate, education and finance. • Attract (get and keep customer interest): • Offers free services to individuals • Attracts employers who pay for their listings CSI 5389

18. Example of Digital Distributor: Monster.com (cont.) • Interact (turn interest into transactions): • Monstere.com offers automatic Job Search Agents, which sends e-mail to customers to alert them about new job postings that match the profile of their desired jobs. • Act (coordinate fulfillment): • Offers a variety of tools such as resume screening for employers • Facilitates closing a new job (e.g., cover letter management) • React (provide after-transaction service): • Offers several services such as apartment finder and moving services to assist individuals who have found new jobs CSI 5389

19. New Competitive Threats • Each of the four Internet business strategies can be used alone or in combination by competitors, and each forms a different kind of threat to a business. • Channel Master: • Can competitors create superior channels to your customers? • Your customers could be attracted by better prices, better services, etc. from your competitors • Customer Magnet: • Can competitors attract your customers and sell them your products? • Your could lose your customer base to someone offering a broader range of services, and be forced to survive as a commodity wholesale supplier to your competitor. CSI 5389

20. New Competitive Threats (cont.) • Value Chain Pirate: • Can competitors hijack your position in the value chain? • Your supplier could leapfrog your position and sell directly to your customers. • Your distributor could obtain parts directly from your suppliers. • Digital Distributor: • Can competitors disaggregate your value proposition? • If your value proposition is based on an aggregation of goods and services, it is possible for a competitor to excel at some part of the overall offering. CSI 5389

21. New Competitive Opportunities • The four Internet business strategies also provide new competitive opportunities. • Channel Master: • Can you improve your customers’ buying experience by improving your cost, convenience, or ability to customize? • Customer Magnet: • Do your customers share broad needs that lend themselves to new bundles of products and services? • Value Chain Pirate: • Can you jump over your direct suppliers or customers and capture their margins? • Digital Distributor: • What parts of other companies’ propositions could you improve by offering them on the Internet? CSI 5389

22. Business Segments • We use the word “segment” to describe collections of businesses with similar requirements for Internet commerce, whether or not they are in the same business area. • Three business segments are selected for consideration of system requirements and design options: • Consumer Retail: Businesses selling physical goods directly to individual end consumers. • Business-to-Business Cataloging: Businesses with online catalogs selling products to other businesses. We focus on MRO (Maintenance, Repair, and Operations) goods. • Information Commerce: Businesses distributing digital goods (e.g., information products and services) online with fulfillment right over the network. CSI 5389

23. Consumer Retail: Value Proposition • Ability to reach a global market • Reduced marketing and selling expenses • Increased efficiency of operation • Ability to target consumers more precisely • Ability to convey more accurate and timely product and availability information CSI 5389

24. B-to-B Cataloging: Value Proposition • Reduced cost of selling • Reduced order processing costs • Improved service levels for low-volume customers • Higher-quality information for customers • Accurate information CSI 5389

25. Information Commerce: Value Proposition • Collapse of the traditional distribution chain • On the Internet, information providers have direct access to information consumers without an intervening distribution channel. • Ability to explore new business models • Because the Internet is ultimately flexible, information providers can easily experiment new business models such as software rentals, pay-per-view documents, etc. CSI 5389

26. Information Commerce: Business Models • Advertiser Support: • A content provider can generate revenue through advertising. • Advertisers pay for impressions: a set of eyes looking at their advertisement. • Advertisers pay for a site that has interesting and compelling content attracting lots of visitors. • Advertisers will pay more if the site can also collect information from visitors such as age, sex, postal code etc. CSI 5389

27. Information Commerce: Business Models (cont.) • Subscription Services: • Subscriptions are traditional models for print, but can also work online. • Consumers pay a fee for access to online information. • Bundling Arrangements: • In order to achieve a sufficient, critical mass of information to attract visitors, content owners may sell access rights to each other. • Thus, a service provider who is not directly in the content business may license access to content for their users. CSI 5389

28. Information Commerce: Business Models (cont.) • Document Sales: • This is a broad category including the online sale of research reports, articles, or software etc. • Usage-Based Charging: • Users pay according to their usage. • Usage can include connect time, search queries, number of pages viewed etc. • Information products (e.g., online newspapers, etc.) and information services (e.g., search engines, online games, etc.) are eligible to usage-based charging. CSI 5389

29. Information Commerce: Business Models (cont.) • Information Marketplace: • Because the Internet greatly reduces transaction costs, it could lead to a world in which the ultimate providers of information sell directly to the ultimate consumers in a vast information marketplace. • Necessary components: • Rights management for authors and publishers • Containers (to protect information in transit and before sale) • Super-distribution to distribute information in secure containers • Clearinghouses to collect fees from end users and distribute them to information providers CSI 5389

30. References • G. Winfield Treese and Lawrence C. Stewart. Designing Systems for Internet Commerce (2nd edition): Chapters 3 & 4. Addison Wesley. • Dr. Thomas Tran Slides CSI 5389