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SECTION 2: Digital Value Chain, E-Business Models

SECTION 2: Digital Value Chain, E-Business Models. Teemu Hakolahti teemu.hakolahti@scp.fi. Digital Value Chain. Value Chain Analysis (Porter, 1985). The primary value chain activities (Porter, 1985).

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SECTION 2: Digital Value Chain, E-Business Models

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  1. SECTION 2: Digital Value Chain, E-Business Models Teemu Hakolahti teemu.hakolahti@scp.fi

  2. Digital Value Chain

  3. Value Chain Analysis (Porter, 1985)

  4. The primary value chain activities (Porter, 1985) • Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required. • Operations: the processes of transforming inputs into finished products and services. • Outbound Logistics: the warehousing and distribution of finished goods. • Marketing & Sales: the identification of customer needs and the generation of sales. • Service: the support of customers after the products and services are sold to them.

  5. Supporting activities(Porter, 1985) • The infrastructure of the firm: organizational structure, control systems, company culture, etc. • Human resource management: employee recruiting, hiring, training, development, and compensation. • Technology development: technologies to support value-creating activities. • Procurement: purchasing inputs such as materials, supplies, and equipment.

  6. Value Chain Definition • Profit depends on its effectiveness in performing these activities the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. • A competitive advantage can be achieved by reconfiguring the value chain • The value chain model is a useful analysis tool for defining a firm's core competencies and the activities: • Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. • Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors.

  7. Changes in Value Chain(Kalakota & Robinson 2001) Traditional value chain Core competence of the company Firm infrastructure and processes Products & Services Distribution channels Customers Changed value chain Needs of customer Integrated distribution channels Products & Services Flexible infrastructure and processes Core competence of the company and outsourcing

  8. Digital Value Chain • How business creates value in both the physical and virtual level? • Interpret differences and interactions among the value adding events of the physical and virtual level • Create valuable digital assets that change the competitive dynamics of industries (Sviokla and Rayport, 1996)

  9. Virtual Value Chain(Rayport, Sviokla, 1996) • Visibility: is where businesses co-ordinate, measure and sometimes control business processes • Mirroring capability: physical steps in the value chain may be substituted with virtual ones • In banking, whereas banks offered a limited portfolio of services • Companies use the flow of information in their virtual value chain to create new customer relationships by delivering value to customers in new ways • E.g. FedEx, package tracking

  10. Intermediation & Disintermediation • Approaches to change the value chain • Business that had previously sold to retailers via distributors could take a decision to sell direct electronically, an approach known as Disintermediation • By shortening the Value Chain, there may be benefits in reduced costs or a more responsive and efficient service

  11. Reintermediation • eBusiness allows the apparent opposite of Disintermediation in which a new step or steps are introduced to the value chain to add value to the process. • This is known as Reintermediation and examples here include shopping portals and electronic insurance brokers.

  12. E-Business Models

  13. Business Model • Business model is an architecture for product, service and information flow, including description of the various business partners and their roles. • It also contains a description of potential benefits for the actors and a description of the sources of revenue • Existing business need to use the Internet to build on their current business model, while at the same time experimenting with new business models to gain a competitive advantage over competitors

  14. E-Business Model • E-business is defined as the transformation of key business processes through the use the Internet technologies • When a company has integrated information and communications technologies (ICTs) into its operations, potentially redesigning its business processes around ICT, then company has adopted a new business model (Source: Chaffey, 2002)

  15. Value Proposition Online Offering Resource System Revenue Model Components of Business Model Source: Rayport & Jaworski, 2004

  16. Value Proposition • Value proposition is constructed from three things: • target segmentation • focal customer benefits, • the key resource of the business that can help deliver the benefit package in significantly better way than its competitors • However, the value cluster approach in online businesses has acquired customisation capabilities that allow them to address multiple customer segments and offer a variety of benefits

  17. Online offering • After the value proposition has been defined, the next step is to decide products, services and information for the online offering • three sequential tasks must be completed : • identify the scope of the offering, • identify the customer decision-making process, • map the online offerings to the customer decision process

  18. Resource System • The resource system shows how a company must select its allies and partners in a business web to deliver the benefits of the value proposition or cluster • Business web (b-web) is a distinct system of suppliers, distributors, commerce service providers, infrastructure providers and customers that use internet for their primary business communications and transactions

  19. Revenue Model • It is often difficult to align the revenue model to company’s value proposition and online offering • Companies are trying to figure out what their customers are willing to pay for, and how much they are willing to pay

  20. Sources of revenue • Advertising. A particular site derives revenue through the sales of advertisements, banners, site sponsorships, event underwriting or other forms of communication. • Product, service or information sales. The income is generated from the sale of goods on the site. • Transaction. The revenue is accrued from charging a fee or taking a portion based cost from transactions. • Subscription. Information and service are a provided on the subscription basis where and access relationship is created on the basis of a fee. • Licence fee. Content is licensed for use for a fee.

  21. Example: Revenue Model for music (see next 2 slides) • Record company’s share of revenues: • Traditional CD = 12% • Digital download = 47% • Music price for customer: • Cost of traditional cd =17$ • Digital download (depends amount of songs, normally 12- 14 songs, each 1$, totally ~ 14$)  WIN –WIN situation for both, record company and customer. But who loses?

  22. Revenue model for a CD(Source: keepmusiccoming.com)

  23. Revenue model for US digital download (Source: FAD Research, 2004)

  24. Business Model Strategy(Source: www.e-future.ca)

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