Business Models and Strategies for the Internet

1. Business Models and Strategies for the Internet

2. “The key question in not whether to deploy Internet technology—companies have no choice if they want to stay competitive—but how to deploy it.” “Our strategy is to integrate the Internet into all of our core businesses.” Michael Porter Professor, Harvard Business School “Quote” Thomas Middelhoff CEO, Bertelsmann, AG, Germany 2

3. Chapter Outline • The Internet: Technology and Participants • How Internet Technology Impacts Company and Industry Value Chains • How the Internet Reshapes the Competitive Environment • Strategic Mistakes Made by Early Internet Entrepreneurs • E-commerce Business Models and Strategies for the Future

4. The Internet : A Revolutionary Driving Force • Adds an important new distribution channel • An important technological tool for performing some value chain activities better and for bypassing others • Alters the strength of competitive forces • Spawns entirely new industries • Affects a company’s competitiveness vis-à-vis rivals

5. Internet Technology • Internet consists of • Integrated network of users’ connected computers • Banks of servers and high-speed computers • Digital switches and routers • Telecommunications equipment and lines

6. Suppliers of Internet Technology and Services • Makers of specialized communications components and equipment • Providers of Internet communications services • Suppliers of computer components and hardware • Developers of specialized software • E-commerce enterprises • Business-to-business merchants • Business-to-consumer merchants • Media companies • Content providers

7. The Impact of Vigorous Competition Among Alternative Internet Technologies • Often, competing technologies have materially different pluses and minuses • Competing technologies may well be incompatible, preventing users of one from interfacing with users of another—and costs of parallel systems may be prohibitive • Strategic options for technology rivals: • Invest aggressively in R&D to win technology race • Form strategic alliances to build consensus for the favored technological approach • Acquire other companies with complementary technological expertise • Hedge the company’s bets by investing resources in more than one of the competing technologies

8. How Internet Technology Impacts Company Value Chain Efficiency • Companies can use the Internet and Internet technologies to improve the efficiency and effectiveness of particular value chain activities • Powerful tool for better supply chain management • Internal operations—just-in-time inventory, gear production schedules and production quantities to buyer orders, more accurate monitoring of buyer preferences and shifts in demand • Collaborative data sharing with distribution channel partners—online systems reduce transactions costs

9. How Internet Technology Can Revamp Company Value Chains • Internet technologies allow some value chain activities to be bypassed entirely • Some manufacturers can build-to-order and sell direct (thus eliminating traditional wholesalers and brick-and-mortar retailers) • Online systems facilitate build-to-order instead build-for-dealer inventory The benefits of Internet technology are pervasive, spawning fundamental changes in the ways business is conducted internally and with suppliers, wholesalers, retailers, and end-users.

10. How the Internet Reshapes the Competitive Environment • The Impact on Competitive Rivalry • Use of Internet widens a firms geographic market reach • Rivalry is often increased by freshly launched e-commerce initiatives of existing rivals • Rivalry is often increased by entry of enterprising dot-com rivals with sell-direct strategies • Rivalry is often increased when an industry consists of online sellers against pure brick-and-mortar sellers against combination brick-and-click sellers

11. How the Internet Reshapes the Competitive Environment (cont.) • The Impact on Barriers to Entry • Entry barriers into e-commerce are often relatively low • Can be easy for newdot-coms to gain entry into some businesses • Can be easy for many existing firms to expand into new geographic markets via online sales When the Internet lowers and industry’s barriers to entry, the outcome is nearly always heightened competition and stronger competitive pressures for industry participants to contend with

12. How the Internet Reshapes the Competitive Environment (cont.) • The Impact on Buyer Bargaining Power • Use of Internet allows buyers to gather extensive information about competing products and brands • Buyers can readily use the Internet to “shop the market” for the best deal • Buyer efforts to seek out the best deal spurs competition among rival sellers to provide the best deal • Internet makes it easier for buyers to join buying groups and pool their purchases to negotiate better terms and conditions Overall impact of Internet is to increase buyer bargaining power (or at least to make buyers wiser and more informed)

13. How the Internet Reshapes the Competitive Environment (cont.) • Impact on Supplier Bargaining Power and Supplier-Seller Collaboration • Helps companies extend geographic reach for the best suppliers • Sometimes via online marketplaces or “e-markets” • Helps companies collaborate closely with suppliers across a wide front—fosters long-term partnerships with key suppliers Impact on bargaining power is unclear—can enhance or diminish bargaining power depending on specific circumstances—have to assess case-by-case

14. Other Strategy-Shaping Features of Internet Technology • Internet is a force for globalizing competition • Internet and PC technologies are advancing at uncertain speeds and in sometimes unexpected directions • Internet technologies tend to reduce variable/incremental costs and tilt the cost structure more toward fixed costs • Some Internet-related businesses have high fixed cost/low variable cost structure, which accounts for heavy losses until sales volume builds significantly • Internet results in much faster diffusion of new technology and new ideas across the world • Widespread adoption of Internet technology puts companies under the gun to move swiftly - “at Internet speed” • The Internet can be an economical means of delivering customer service • The capital for funding new e-businesses is available for ventures with solidly attractive business models and has dried up for ventures with dubious prospects

15. Difficulty of Relying on Internet Technology to Gain Competitive Advantage • All companies are rapidly gaining experience in use and application of Internet technology • Mostly with use of generic, off-the-shelf software packages readily available to rivals • Most industry participants gravitate to use of many of the same Internet technology applications (and achieving comparable operating benefits) • Achieving sustainable competitive advantage generally requires use of proprietary Internet technology not readily available to rivals

16. The First Mover Advantage Myth • Early Internet businesses failed to capture a durable competitive edge over “late-moving” rivals because • User/buyer switching costs to visit/patronize new sites of competitors are very low (not high as some once believed) • Network effects (where a site’s features became more valuable as more people use them) have proven comparatively weak in blocking competition from rivals and discouraging Internet users from using multiple networks

17. Strategic Mistakes Made by Early Internet Entrepreneurs • The mistake of ignoring low barriers to entry • Eager capital providers paved the way for market overcrowding and fierce rivalry • The mistake of competing solely on the basis of low price • Price became the predominant attention-getting competitive variable—price war atmosphere turned into a battle for market share and profits later (when volume built to levels high enough to support fixed costs) • Low price is not a competitive advantage unless it is accompanied by truly lower costs

18. Strategic Mistakes Made by Early Internet Entrepreneurs (cont.) • The mistake of selling below cost and trying to make it up with revenues from other sources (selling site ads, charging partners for click-throughs to their site, selling data on visitor browsing patterns) • Foolish to employ price discounting without offsetting cost advantage • Makes firm reliant on ever-rising ad revenues to offset losses from growing unit sales volumes below cost • Ignores strong bargaining power of Internet advertisers

19. E-Commerce Business Models and Strategies for the Future • Three basic options • A “pure” dot-com strategy • Combination brick-and-click strategies • A traditional business that only uses Internet technology to improve operational effectiveness and value chain efficiency

20. Business Models and Strategies for “Pure” Dot-Com Enterprises • Successful dot-com strategies tend to incorporate the following features: • A distinctive strategy that delivers unique value to buyers and makes buying online very appealing • Deliberate efforts to engineer a value chain that enables differentiation or lower costs or better value for the money • Focusing on a limited number of competencies and performing a specialized number of value chain activities where proprietary Internet applications and capabilities can be developed

21. Business Models and Strategies for “Pure” Dot-Com Enterprises (cont.) • Successful dot-com strategies tend to incorporate the following features (cont.): • Having strong capabilities in cutting-edge Internet technology • Using innovative marketing techniques that are efficient in reaching the targeted audience and effective in stimulating purchases (or help boost ancillary revenues like advertising) • Minimal reliance on ancillary for bottom-line profitability • Keeping the Web site fresh, user-friendly (Southwest Airlines) , and often entertaining (eBay) or innovative (audio, video, appealing to eye, interesting content)

22. Issues for “Pure” Dot-Com Enterprises • Broad versus narrow product lines • One-stop shopping (Amazon.com, eBay) or a classic focus strategy (eToys) • Whether to outsource order fulfillment to specialists or handle it internally • Whether to employ unconventional business models and strategies • Yahoo!—rely heavily on advertising • Provide information for a fee • Pay per use (software, video games) • Priceline.com

23. Brick-and-Click Strategies: An Appealing Middle Ground Strategy • Gives customers the option of shopping online or in stores • Effective when customers want to see or inspect before purchasing • Effective when customers want to do some part of their business in person and some online (banking) • Many brick-and-mortar enterprises can enter online retailing at relatively low costs (a web site and systems for filling and delivering customer orders) • Web ordering can enhance the value of local stores because they can be used as local stocking and delivery/pick-up points (Office Depot)—eliminates the need for picking, packing, and shipping from a central warehouse

24. Internet Strategies for Traditional Businesses • Few, if any, businesses can/should avoid making use of Internet technology to squeeze out internal cost savings and improve operational effectiveness • Key issue is how to use the Internet to position the company in the marketplace • Use Internet as • company’s exclusive distribution channel • primary channel • one of several important channels • secondary or minor channel • Solely as a vehicle for disseminating product information (with traditional distribution channel partners making all sales to end-users)