E-commerce

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CHAPTER

2

E-commerce Business Models and Concepts L E AR N I N G O B J E C T I  E ! A"ter readin# t$is c$apter% c $apter% &ou 'ill (e a(le to) 1■ Identify

the key components of e-commerce business models. 2■ Describe the major B2C business models. 3■ Describe the major B2B business models. 4■ Recognize business models in other emerging areas of e-commerce. 5■ nderstand

2  0  0  8  9  3  5  8 1 4

key business concepts and strategies applicable to e- commerce.

ECo mm mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEd i t i o n,b yKe nn et hC. C.L au do na ndCa Ca r o l Gu er c i oT r a v er .Co py r i g ht©2 00 9b y Ke nn et hC.L au do na ndCa r o l Gu er c i oTr a v er .Pu bl i s h edb yPr e nt i c eHa l l ,ad i v i s i o no fP ea r s o nEd uc a t i o n,I n c .

ECo mm mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEd i t i o n,b yKe nn et hC. C.L au do na ndCa Ca r o l Gu er c i oT r a v er .Co py r i g ht©2 00 9b y Ke nn et hC.L au do na ndCa r o l Gu er c i oTr a v er .Pu bl i s h edb yPr e nt i c eHa l l ,ad i v i s i o no fP ea r s o nEd uc a t i o n,I n c .

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g belo)market prices and free deli#ery of  e#en small orders at just about any time of the day or night in urban areas often clogged )ith traffic. But the pundits did not count on anhattan(s ,reshDirect/ or the ability of traditional grocery chains to mo#e into the ashes of the online grocery business to create solid+ profitable businesses. $upiter  Research estimates that online grocery sales )ill garner sales of '0.1 billion in 2%%+ and by 2%&2+ sales are epected to gro) to '&3.1 billion+ a compound annual gro)th rate of about &04. ,reshDirect and other   traditional firms are

l e a r  n i n g h o )

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irms such as California(s

p r  o f  i t a b l e

huge *afe)ay *tores

and

Royal

6hold

7Dutch

o)ner 

of

the

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*top 8 *hop and 9iant food stores+ among others+ and the Internet

firm

:eapod+ )hich

t o e  p l o i t t h i s p o t e n t i a l m a r  k e t ) i t

b u s i n e s s

handles Internet shopping

for 

*top 8 *hop and 9iant; are follo)ing

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lead

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successful British

grocer 

m o d e l s .

5esco.

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2%%+ more than three times as many as its nearest competitor 5esco takes o#er 3%+%%% *+ online orders per day. In the nited *tates+ *afe)ay(s )holly-o)ned subsidiary 9rocery"orks.com pro#ides online shopping and deli#ery ser#ices for *afe)ay stores in

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T e ch no l o gy , a ndSo c i e t y2 0 09,Fi f t h Ed i t i o n,b yKe nn e t hC.L au d onan d Ca r o l Gu er c i oT r a v er .Co py r i g ht© 2009byKennet hC.Laudonand Ca r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr en t i c eHal l ,adi v i s i o nofPear s on Ed uc at i o n,I n c.

*,

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! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

California+ Aregon+ "ashington+ 6rizona+ aryland+ irginia+ and the District of  Columbia and for ons stores in *outhern California and as egas+ Ee#ada. Customers register online+ entering their  personal information+ including their  fre?uent shopper cards. 5hey are sho)n lists of recently purchased items to speed selection. 5he prices of goods are the same as those in the stores. *afe)ay has socalled FpickersG roam the aisles of nearby stores using a computerized picklist that directs them through the store in an efficient pattern+ and e#en specifies the order of  packing goods into bags. 5he orders are put into a #an and deli#ered to the customer  )ithin a t)o-hour )indo) for a fee of '&%.  6t :eapod.com+ )hich ser#es *top 8 *hop and 9iant ,ood store customers in & regional markets+ shoppers can #ie) both their online ordering history and their off-line purchases at nearby stores during the pre#ious four months. 5he "eb site also features a shopping list that displays items in the order they can be found at the customer(s local store. Customers ha#e the option of ordering online or printing the shopping list and taking it to the store. ,or  these traditional supermarket chains+ the #alue being offered to customers is con#enience and time sa#ings at prices only marginally higher than self-shopping. ,reshDirect has a more re#olutionary but also successful approach. In $uly 2%%2+ $oe ,edele and $ason 6ckerman founded ,reshDirect as a ne) kind of high-?uality and high-tech food preparation and deli#ery ser#ice in anhattan+ and raised '&2% million in #enture funding. Aperating out of  a 3%%+%%%-s?uare-foot plant in Hueens/  just across the ri#er from anhattan/ ,reshDirect trucks deli#er groceries to

densely populated anhattan+ Brooklyn+ and Hueens at prices 214 belo) )hat most Ee) ork grocers charge. It charges a '1.>
co-founder

$ason

6ckerman

likens ,reshDirect to Dell Inc. in this regardM ,reshDirect employs the same Fmake-toorder+G

manufacturer-direct

philosophy

as

does Dell. Cleanliness is an obsession/the factory )as built to eceed .*. Department of   6griculture standards. 5he firm uses *6: soft)are 7an enterprise resource planning system; to track in#entory+ compile financial reports+ tag products to fulfill customers( orders+ and precisely control production do)n to the le#el of telling bakers ho) many bagels to cook each day and )hat temperature to use.

It

con#eyors

uses

automated

carousels

and

to bring orders to food-prep

)orkers and packers. 5he ,reshDirect "eb site is po)ered by B!6 *ystems(

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n ne t hC.L a ud o na n dCa r o lGu er c i oT r a v e r . Co p y r i g h t©2 0 09b yKennet hC.Laudonand Ca r o lGu er c i oT r a v e r .Pu bl i s he db yPr e nt i c eHa l l , adi v i s i o no fP ear s onEd uc at i o n,I n c.

2  0  0  8  9  3  5  8 1 4

! - c o m me r c e B u s in e ss  od e ls a n d C o nc e p ts

* million orders since opening for  business+ had annual re#enue in

"eblogic platform+ )hich can 2%%0 of around '2>% million+ and track customer preferences+is report-edly profitable. 5ypical such as the le#el of fruit order size has gro)n from '0< to ripeness desired+ or theo#er '&>1 dollars the number of  preferred )eight of a cut of orders per )eek a#erages around meat. ,reshDirect also uses >%+%%% and the company has Eet5racker+ "eb site trafficabout 21%+%%% acti#e customers. and online beha#ior analysisBut despite all this success+ soft)are+ to help it better ,reshDirect has remained understand and market to its conser#ati#e. 6ccord-ing to $ason online customers. 6t peak 6ckerman+ )hat ,reshDirect times+ the "eb site haslearned from "eb#an(s demise handled

up

to

&+%%%)as thatM F5his is a #ery comple simultaneous shoppingbusiness+ and the customer  sessions. 5he final piece indemands perfection e#ery time the formula for profit is a )e fill an order. "eb#an(s rapid supply chain that includesepansion )as unmanageableN dealing

directly

)ith no

matter ho) good the manufacturers and gro)ers+eecuti#e team.G 6lthough in thus cutting out the costs of $anuary 2%%0+ ,reshDirect middle-le#el distributors andreaffirmed that it had no plans to the huge chains themsel#es.take its business model ,reshDirect does not acceptnation)ide any time soon+ by slotting fees/payments $anuary 2%%+ the company had made by manufacturers for begun to change its tune+ )ith shelf space. Instead+ it asks ,reshDirectOs chief marketing suppliers to help it directofficer *te#e Druckman stating+ market to consumers and toP"e )onOt just stay regional. ItOs a lo)er prices. 5o further matter of time.P encourage lo)er prices from

,reshDirect also says its the )ith after deli#ery+ do)n from the 6mazon+ )hich entered the industry pattern of 31 days. online grocery marketspace in  6s of $uly 2%%+$une 2%%K. Initially+ 6mazon ,reshDirect deli#ers tooffered only nonperishable around &K% zip codes in the foods+ such as pasta+ cereal+ Ee) ork City metropolitanand canned goods. But in area and adjacent suburbs. It 6ugust 2%%0+ 6mazon+ taking a has fulfilled more than K fr th ,r hDir t suppliers+ ,reshDirect paysnot concerned about them in four business daysprospect of competing

playbo ok+ launch ed a micro site+ ,resh.  6maz on.co m+ )hich offers locally gro)n fresh meat+ fruit+ and #egeta bles. 5he site )as initially a#aila ble only to in#ited custo mers )ho li#ed on erce r  Island+ a suburb locate d near   6maz on(s

*eattle distribution center+ but has since epanded to !O.RCE!) F,reshDirect-@elp-,6Hs+G ser#e 2> zip codes in the,reshDirect.com+ $uly 3+ 2%% :eapod C *eattle metropolitan area.Corporate ,act *heet+P :eapod.com+ $uly 3+ 2%% P*imonDeli#ers ore+P by 9ene Rebeck+ Twin Cities  6ccording to businessBusiness+ arch 2%% P*afe)ay.com 9ro)s by analyst $ohn @auptman+Eearly 334 in 2%%0+P Internet Retailer + ,ebruary 20+ 2%% P,reshDirect *ees Broader arket @orizons F"hat they are doing )ith 6head+P Internet Retailer + $anuary &K+ 2%% this pilot looks a lot like the F9rocery-"orks.com+ C+G 9oogle ,inance+ 6ugust 22+ 2%%0 F6mazon 9ets ,resh )ith an !panded business model ,reshDirect9rocery *er#ice+G Internet Retailer + 6ugust 3+ 2%%0 suc-cessfully implementedF,reshDirect Celebrates ,i#e ear 6nni#ersary+G :REe)s)ire+ $uly <+ 2%%0 F,reshDirect *taying in Ee) ork.G Close to @ome+G Internet Retailer + $anuary 2>+ 2%%0

*hould ,reshDirect start to )orryL

FAnline 9rocer :eapod 9oes ulti-Channel )ith *top 8 *hop and 9iant ,ood+G Internet Retailer + $anuary 3&+ 2%%0 F5esco Dominates Internet *hopping+G QDEet.co.uk+ 6ugust 2>+ 2%%K F6 ,resh  6pproach to 5echnology+G by Darrell Dunn+ Information Week + $anuary 2>+ 2%%1 F"eb 9rocer

@its Refresh+G by $ennifer @arsany+ PC Magazine+

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ECommer ce: Bu s i n es s , T e c h no l o g y ,a n d So c i e t y2 0 09, Fi f t hEdi t i on,by K en n e t hC. Laudonand Ca r o l Gu er c i o T r a v e r .Co py r i g ht ©2009b y K en n e t hC. Laudonand Ca r o l Gu er c i o T r a v er .Pu bl i s hed b yPr ent i c eHal l , adi v i s i onof P e a r s o n Ed uc at i o n,I n c.

ay &+ 2%%> F,reshDire ctM Ready to Deli#er+G by arry Dignan+ Baseline+

,ebruary &0+ 2%%> F"hat ,reshDirec t earned from Dell+G by 5im aseter+ Barrie Berg+ and artha 5urner+

Stategy+ Business+

*pring 2%%3.

**

C @ 6: 5! R 2

5

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

he story of ,reshDirect illustrates the difficulties of turning a good business idea into a good business model. ,reshDirect and the other  Fne)G online groceries )ork as business models because their  managers

ha#e #ery carefully thought out the operational details of their ideas+ and they ha#e eecuted these ideas )ith efficiency and precision. In the early days of e-commerce+ thousands of firms disco#ered they could spend other people(s in#ested capital much faster than they could get customers to pay for their products or ser#ices. In most instances of failure+ the business model of the firm )as faulty from the #ery beginning. In contrast+ successful e-commerce firms ha#e business models that are able to le#erage the uni?ue ?ualities of the "eb+ pro#ide customers real #alue+ de#elop highly effecti#e and efficient operations+ a#oid legal and social entanglements that can harm the firm+ and produce profitable business results. In addition+ successful business models must scale. 5he business must be able to achie#e efficiencies as it gro)s in #olume. But )hat is a business model+ and ho) can you tell if a firm(s business model is going to produce a profitL In this chapter+ )e focus on business models and basic business concepts that you must be familiar )ith in order to understand e-commerce. 2.1

(usiness model

E-COMMERCE B.!INE!! MO/EL! (usi nes s plan

a set of planned acti#ities designed to result

a

in a profit in a marketplace

docu

ment that describes a firm(s

I

business model

n

e-commerce (usiness model a business model that aims to use and le#erage the uni?ue ?ualities of the

)hy a INTRO/.CTION parti  6 (usiness model is a set of cula   planned acti#ities 7sometimesr  referred to as business  processes;com designed to result in a profit in a pan marketplace. 6 business model isy not al)ays the same as a businesshas strategy although in some casessucc they are #ery close insofar as the eed business model eplicitly takes into ed account the competiti#eor  en#ironment 7agretta+ 2%%2;. 5he faile business model is at the center of d the business plan. 6 (usiness plan7=im is a document that describes a firm(sand business model. 6 business planau al)ays takes into account theborg competiti#e en#ironment. 6n e-ne+ commerce (usiness model   aims2%% to use and le#erage the uni?ue%;. ?ualities of the Internet and the In "orld "ide "eb 75immers+ &<<;. the follo EIGHT 0E1 ELEMENT! O2 A )ing B.!INE!! MO/EL secti If you hope to de#elop aon+ successful business model in any)e arena+ not just e-commerce+ you des must make sure that the modelcrib effecti#ely addresses the eighte elements listed in Ta(le 345.eac 5hese elements areM #alueh of  proposition+ re#enue model+the market opportunity+ competiti#ekey en#ironment+ competiti#ebusi ad#antage+ market strategy+nes organizational de#elopment+ ands management team 79hosh+ &<<;.mod any )riters focus on a firm(sel #alue proposition and re#enueele model. "hile these may be themen most important and most easilyts identifiable aspects of amor  company(s business model+ thee other elements are e?uallyfully. important )hen e#aluating business models and plans+ or  )hen attempting to understand

e :Bu s i n es s ,T e c hn ol o gy , a ndSo c i e t y2 00 9, 9,Fi f t h Ed i t i o n,b yKe nn e t hC. C.L au d onan d Ca r o l Gu er c i oT r a v er .Co py r i g ht© 2009by yK Kennet hC.Laudonand Ca r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr en t i c eHal l ,adi v i s i onofPear s on Ed uc at i o n,I n c.

! - co m me r ce B u si n e ss  odels

TABLE 345 0E1 ELEMENT! O2 A B.!INE!! MO/EL

CA:AE!E5*

=! H!*5IAE*

alue proposition

"hy should the customer buy from youL

Re#enue model arket opportunity

@o) )ill you earn moneyL "hat marketspace do you intend to ser#e+ and )hat is its sizeL

Competiti#e en#ironment Competiti#e ad#antage

"ho else occupies your intended marketspaceL "hat special ad#antages does your firm bring to

the marketspaceL @o) do you plan to promote your products or  ser#ices to attract your target audienceL "hat types of organizational structures )ithin the firm are necessary to carry out the business planL "hat kinds of eperiences and background are important for the company(s leaders to ha#eL

arket strategy Arganizational de#elopment

anagement team

        4         1         8         5         3         9         8         0         0         2

alue Proposition

 6 company(s #alue prop pr opos osit itio ion n is at th the e #ery heart of its busi bu sine nes ss mod odel el.. 6 6alue

proposition

defines ho) a company(s product or  serr#i se #ice ce ful ulfi fill lls s th the e need ne eds s of  customers 7=am 7= ambi bil+ l+ 9ins 9i nsbe berg rg++ and Blo Bloch+ ch+ &<< &<<;. ;. 5o de#elop andor   analyze a firm(s #alue proposition+ you need to und nder erst stan and d )h )hy y customers custo mers )ill choose to do bu busi sine ness ss )i )ith th the th e fir irm m in inst stea ead d of  another company and )hat the firm pro#ides that other firms do not and cannot. ,rom the consumer point of  #ie) #i e) su succ cces essf sful ul e-

com mer  ce #alu e pro posi tion s incl udeM pers onal izati on and cust omi zati on of  pro duct offer  ings + red

uction of pro uction produc ductt sea search rch cos costs+ ts+ redu re duct ctio ion n of pr pric ice e di disc sco# o#er ery y costs+ and facilitation of   tran ans sactions by managing 6 productt deli#e produc deli#ery ry 7=amb 7=ambil+ il+ &<<0a Bakos+ &<<;. ,res ,r eshD hDire irect ct++ fo forr in inst stan ance ce++ primar pri marily ily is off offeri ering ng cus custom tomers ers the fre freshe shest st per perish ishabl able e foo food d in Ee) ork+ dire rec ct from the gro)er gro )ers s and man manufa ufactu cturer rers+ s+ at the lo)e lo)est st pri prices ces++ del deli#e i#ered red to their the ir hom homes es at nig night. ht. 6lthoug 6lthough h loca lo call su supe perm rmar arke kets ts ca can n of offfer  fresh food also+ customers need to spend an hour or t)o shopping at th thos ose e st stor ores es e# e#er ery y )e )eek ek.. Con#enience and sa#ed time are #ery #e ry im impo port rtan antt el ele eme men nts in ,reshDirect(s #alue proposition to customers. Before 6mazon eisted+ most customers custo mers person personally ally tra#e tra#eled led to book retailers to place an order. In some cases+ the desired book might not be a#ailable and the cust cu stom omer er )o )oul uld d ha ha#e #e to )a )ait it se#eral days or )eeks+ and then return to the bookstore to pick it up. 6mazon makes it possible for  book lo#ers to shop for #irtually any book in print from the comfort of their home or office+ 2> ho hour urs s a da day y+ an and d to kn kno) o) immediately )hether a book is in stock. sto ck. 6m 6mazo azon(s n(s pri primar mary y #al #alue ue prop pr opos osit itio ions ns ar are e un unpa para rallllele eled d selection and con#enience.

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y2 0 09, Fi f t hEd i t i o n,b yKe nn et hC. L au do nan dCa r o l Gu er c i oT r a v e r . Co p y r i g h t©2 0 0 9b yKe n n et hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s he db yPr e nt i c eHa l l ,a d i v i s i o no fP ea r s o nEd uc at i o n,I n c.

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt C @ 6: 5! R 2 s *7 opposed to frozen or  canned goods/is a I trend ,reshDirect(s n founders took note of+ man  just as *tarbucks( y founders sa) the case gro)ing interest in and s+ demand for coffee bars com nation)ide. Both pani companies )atched the es market and then de#e re6enue model describes ho) the firm lop de#eloped their #alue )ill earn re#enue+ produce profits+ and proposition to meet their  produce a superior return on in#ested )hat they percei#ed to #alu capital be consumers( demand e for certain products and prop ser#ices. ositio n Re6enue Model base d on  6 firm(s re6enue model curre describes ho) the firm nt )ill earn re#enue+ mark generate prof-its+ and et produce a superior  cond return on in#ested itions capital. "e use the or  terms reenue mo!el  trend and financial mo!el  s. interchangeably. 5he Cons function of business umer  organizations is both to s( generate profits and to ad6ertisin# re6enue model incre produce returns on a company pro#ides a forum for asin in#ested capital that ad#ertisements and recei#es fees from g ad#ertisers eceed alternati#e emp in#estments. :rofits hasis alone are not sufficient su(scription re6enue model to make a company a company offers its users content or on fresh FsuccessfulG 7:orter+ ser#ices and charges a subscription peris &<1;. In order to be fee for access to some or all of its habl offerings considered successful+ e a firm must produce food returns greater than s/ alternati#e in#estments. as ,irms that fail this test

g R

)ho pays for the computer sear  using cash or a credit card. ch 5his produces re#enue. 5he engi merchant typically charges ne more for the computer than it and pays out in operating other  epenses+ producing a profit. form But in order to go into s of  business+ the computer onlin merchant had to in#est capital e /either by borro)ing or byad#e dipping into personal sa#ings. rtisin 5he profits from the business g. I constitute the return on in#ested capital+ and thesen the returns must be greater than su(s the merchant could obtaincripti else)here+ say+ by in#estingon in real estate or just putting re6e the money into a sa#ings nue account. mod  6lthough there are many el+ a different e-commerce re#enue "eb models that ha#e been site de#eloped+ most companiesthat rely on one+ or some offer  combination+ of the follo)ing s its major re#enue modelsM the users ad#ertising model+ the conte subscription model+ the nt or  transaction fee model+ the ser#i sales model+ and the affiliate ces model. char  In the ad6ertisin#ges a re6enue model+ a "eb site subs that offers its users content+ cripti ser#ices+ andor products also on pro#ides a forum for fee   ad#ertisements and recei#esfor  fees from ad#ertisers. 5hose acce "eb sites that are able to ss to attract the greatest some #ie)ership or that ha#e a or all highly specialized+of its differentiated #ie)ership andofferi are able to retain user ngs.   attention 7FstickinessG; are ,or  able to charge higherinsta   ad#ertising rates. ahoo+ for nce+ instance+ deri#es a significant the

online Consumer

#ersion

of  

Reports

pro#ides access to premium con-tent+ such as detailed ratings+ re#ie)s and recommendations+ only to subscribers+ )ho ha#e a choice of paying a '1.<1 monthly subscription fee or a '2K.%% annual fee. !perience )ith the subscription re#enue model indicates that to successfully o#ercome the disinclination of users to pay for content on the "eb+ the content offered must be percei#ed as a high-#alue-added+ premium offering that is not read-

2  0  0  8  9  3  5  8 1 4

T ec hnol

o gy G , a u n e d r c S i o o c T i r e a t v y e r 2 . 0 C 0o 9 p , y r i g ht T r a v e r . Pu bl i s he db y Fi f t hEd i t i on,b yKenn et h Pr ent i c eHal l ,adi v i s i onof C.L L a a u u d d o o n na a n n d dC Ca a r r o o l l Gu e r c i o Pe ar s o nEd uc a t i o n,I n c .

! - co m me r c e B u s in e s s  o d el s

*8

NOTAVAI LABLEFOR ELECTRONI CVI EWI NG         4         1         8         5         3         9         8         0         0         2

ily a#ailable else)here nor  easily replicated. Companies successfully offering content or ser#ices online on a subscription basis include atch.com and e@armony 7dating ser#ices;+  6ncestry.com 7see 2i#ure 345; and 9enealogy.com 7genealogy research;+ icrosoftOs Sboli#e.com 7#ideo games;+ Rhapsody Anline 7music;+ among others. In the transaction "ee re6enue model+ a company recei#es a fee for enabling or eecuting a transaction.

,or  eam ple+ eBay pro#id es an online auctio n marke tplace and recei# es a small transa ction fee from a seller  if the seller  is succe ssful in selling the item. !T5ra de+ an

onlin onl ine e stockbro rok ker+r  rece re cei# i#es es tran tr ansa sact ctio ion n fees each time it eecutes a stock transaction on behalf of  a customer. In the sales re6enue model+ companies deri#e re#enue by selling good go ods+ s+ in info form rmat atio ion+ n+ or  ser#ic ser #ices es to cus custom tomers ers.. Com omp pan aniies such as  6mazon 7)hich sells books+ music+ and other  products;+ produc ts;+ Bean Bean.com+ .com+ and 9ap 9ap.co .com+ m+ all ha# ha#e e sales re#enue models. In the a""iliate re6enue re6e nue mod model el+ si sittes that steer business to an FaffiliateG recei#e a referral fee or   percentage of the

EComm mmer ce: Bu s i n es s ,T e c h no l o gy , a ndSo c i e t y2 0 09,Fi f t h Ed i t i o n,b yKe nn et hC. L a u do na ndCa r o l Gu er c i oT r a v e r . Co p y r i g h t©2 0 0 9b y Kennet hC.Laudonand Ca r o lGu er c i oTr a v er . Pu bl i s h edb yPr e nt i c e Hal l ,adi v i s i onof Pe ar s o nEd uc a t i o n,I n c .

a company steers business to an affiliate and recei#es a referral fee or percenta ge of the re#enue

transaction "ee re6enue model

a company recei#es a fee for enabling or eecuting a transaction

sales re6enue model a company

deri#es re#enue by selling goods+ information+ or ser#ices

a""iliate re6enue model

from any resulting sales

9:

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

C @ 6: 5! R 2

2IE PRIMAR1 REEN.E MO/EL!

TABLE 343

R !  !E  !  A D !

!S6:!*

R!!E

 6d#ertising

ahoo a hoo

*ubscription

"*$.com Consumerreports.org

5ransaction ,ee

eBay !-5rade

*ales

6mazon Bean 9ap $C:enny.com

,ees from echange f  ad#ertisem ,ees from s echange f   content or ,ees 7com enabling or transaction *ales of go information+

 6ffiliate  6ffili ate

y:oints

mar;et opportunit& refers to the

company(s intended marketspace and the o#erall potential financial opportunities a#ailable to the firm in that marketspace

mar;etspace the area of actual or potential commercial #alue in )hich a company intends to operate

free bies+ and y: oints rece i#es a fee. Com mun ity feed back sites such as !pin ions rece i#e muc h of  their  re#e

nue from steering potential customers to "eb sites )here they make a purchase. Ta(le 343

summarizes these major re#enue models. Mar;et Opportunit& 5he

term

mar;et

opportunit& ref refers ers to

the company(s intended mar;etspace 7i.e.+ an area of actual or potential commercial #alue; and the o#erall pot oten enttial fina fi nanc nciial opportunities a#ailable to the firm in that marketspac ace e. 5he market mar ket opp opport ortuni unity ty is usua us uall lly y di di#i #ide ded d in intto smaller market niches. 5he 5h e re real alis isti tic c ma mark rket et opportuni oppor tunity ty is defin defined ed

b y ,

,ees for busi

assume assu me yo you u ar are e an anal aly yzi zing ng a soft)are soft) are traini training ng compa company ny that create tes s soft)are-learning systems for sale to corporations o#er o# er th the e In Inte tern rnet et.. 5h 5he e o# o#er erall all size si ze of th the e so soft ft)a )are re tr trai aini ning ng market for all market segments is appro approimat imately ely '0% billion billion.. 5he o#er o# eral alll ma mark rket et ca can n be br brok oken en do)n+ do) n+ ho) ho)e#e e#er+ r+ int into o t)o maj major  or  markett segm marke segmentsM entsM instr instructor uctor-led -led training products+ )hich comp co mpri rise se ab abou outt 0% 0%4 4 of the market 7'>< billion in re#enue;+ and an d co comp mput uter er-b -bas ased ed tr train aining ing++ )hic )h ich h ac acco coun unts ts fo forr 3% 3%4 4 7' 7'2& 2& billion;. 5here are further market nich ni ches es )i )itthi hin n ea each ch of th thos ose e major market segments+ such as the ,ortune 1%% computer-based train tr aining ing ma mark rket et an and d th the e sm smal alll bus bu siness computer-ba bas sed training market. Because the firm is a startup firm+ it cannot compete effecti#ely in the large busi bu sine ness ss++ comp co mput uter er-b -ba ase sed d trai tr ain nin ing g mar arke kett 7a 7abo bout ut '& '&1 1 bill bi llio ion; n;.. ar arge ge bran br and d-n -nam ame e trai tr aini ning ng fi firm rms s do domi mina nate te th this is niche nic he.. 5h 5he e st star artu tup p fi firm rm(s (s re real al market mar ket opportun opportunity ity is to sel selll to the thousands of small business business firms )ho spend about 'K billion on co comp mput uter er-b -bas ased ed so soft ft)a )are re train tr aining ing an and d )h )ho o de desp sper erat ately ely need ne ed a co cost st-e -eff ffec ecti ti#e #e tr trai ainin ning g solution. 5his is the size of the firm(s realistic market opportunity 7see 2i#ure 343;.

e :Bu s i n es s ,T e c hn ol o gy , a ndSo c i e t y2 00 9,Fi f t h Ed i t i o n,b yKe nn e t hC.L au d onan d Ca r o l Gu er c i oT r a v er .Co py r i g ht© 2009byKennet hC.Laudonand Ca r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr en t i c eHal l ,adi v i s i onofPear s on Ed uc at i o n,I n c.

! - co m me r ce B u si n e ss  odels

2IG.RE 343 MAR0ET!PACE AN/ MAR0ET OPPORT.NIT1 IN THE !O2T
arketspaces are composed of many market segments. our realistic market opportunity )ill typically focus on one or a fe) market segments.         4         1         8         5         3         9         8         0         0         2

Competiti6e En6ironment

 6 firm(s competiti6e en6ironment refers to the other companies selling similar   products and operating in the same marketspace. It also refers to the presence of substitute products and potential ne) entrants to the market+ as )ell as the po)er of customers and suppliers o#er  your business. "e discuss the firm(s en#ironment later in the chapter. 5he competiti#e en#ironment for a company is influenced by se#eral factorsM ho) many competitors are

acti# e+ ho) larg e their  oper  ation s are+ )hat the mar  ket shar  e of  each com petit or is+ ho) profi table thes e firms are+ and ho)

they price their products. n ,irm ,i rms s ty typi pica cally lly ha ha#e #e bo both th direct and indire indirect ct compe competitor titors. s. Dire Di rect ct co comp mpet etit itor ors s ar are e th thos ose e companies that sell products and ser#ices that are #ery similar and into the same market segment. ,orr ea ,o am mpl ple e+ :ri rice celi line ne an and d 5ra#e 5r a#eloc locity ity++ bot both h of )ho )hom m sell discount airline tickets online+ are direct competitors because both companies sell identical products /cheap tickets. Indirect competitors are companies that may be in different industries but still compe compete te indire indirectly ctly because their products can substitute for  one on e an anot oth her er.. ,o ,orr in inst stan ance ce++ automo aut omobil bile e man manufa ufactu cturer rers s and airl ai rlin ine e co comp mpan anie ies s op oper erat ate e in different industries+ but they still compete compe te indire indirectly ctly because they offe of ferr cons co nsum umer ers s alte al tern rnat ati# i#e e means of transportation. CEE.com+ a ne)s outlet+ is an indirect competitor of !*:E.com not bec becaus ause e the they y sel selll iden identic tical al products+ produc ts+ but becau because se they both comp co mpet ete e fo forr co cons nsum umer ers( s( ti time me online. 5he 5h e e eis iste tenc nce e of a la larg rge e

ECo mm mme r c e :Bus i n e s s, T e ch no l o gy , a ndSo c i e t y2 0 09, Fi f t hEd i t i o n,b yKe nn et hC. L au do nan dCa Ca r o l Gu er c i oT r a v e r . Co p y r i g h t©2 0 0 9b yK yKe n n et hC. L au do nan dCa Ca r o l Gu er c i oT r a v e r . Pu bl i s he db yPr e nt i c eHa l l ,a d i v i s i o no fP ea r s o nEd uc at i o n,I n c.

competiti6e en6ironment refers

to the other 

companies operating in the same marketspace selling similar products

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt C @ 6: 5! R 2 s 93 er++ &< er &<1 1;. ;. ,i ,irm rms s al also so compete on scope. Com petit *ome firms can de#elop competiti6e ad6anta#e achie#ed by a i6e glob gl obal al ma mark rket ets+ s+ )h )hilile e Ad6 firm )hen it can produce a superior othe ot herr fir irm ms ca can n on only ly anta product andor bring the product to de#e de #elo lop p a na nati tion onal al or  #e market at a lo)er price than most+ or regiona reg ionall mar market ket.. ,irm ,irms s all+ of its competitors ,irm that can pro#ide s sup su per erio iorr pr prod odu uct cts s at achie lo)est cost on a global #e a basis are truly com ad#antaged. petiti ,irms achie#e 6e compet com petiti iti#e #e ad# ad#ant antage ages s ad6a because they ha#e as&mmetr& eists )hene#er nta# some so meho ho) ) be been en ab able le to one obtain differential access participant in a market has more e resources than other participants )hen to the factors of   they production that are can denied to their   "irst-mo6er ad6anta#e a competiti#e prod compet com petito itors/ rs/at at lea least st in market ad#antage for a firm that uce a the sho short rt ter term m 7B 7Barn arney ey++ results from being the first into a supe &<<&;. &<< &;. :er :erhap haps s the fi firm rm marketplace )ith a ser#iceable rior  has been able to obtain product or ser#ice prod #ery fa#orable terms from uct suppl su pplie iers rs++ sh ship ippe pers rs++ or  complimentar& resources and sour urc ces of labor or.. Ar  resources and assets not directly or  perrha pe haps ps the fi firrm has in#ol#ed in the production of the bring more eperienced+ product but re?uired for success+ such the kno)ledgeable+ and loyal as marketing+ management+ financial prod empl ploy oye ees than any assets+ and reputation uct to compet com petito itors. rs. ay aybe be the mark firm fi rm has a pa pate tent nt on a un"air competiti6e et at product that others ad6anta#e a cannot imitate+ or access occurs )hen one firm de#elops an lo)er  to in in# #es esttme men nt ca capi pita tall ad#antage based on a factor that price thr hrou oug gh a ne net) t)or ork k of  other firms cannot purchase than former business most+ coll co llea eagu gues es or a br bran and d or all+ name and popular image of  that th at ot othe herr fi firm rms s ca cann nnot ot their  duplicate. dupli cate. 6n as&mmetr& comp eis e ists ts )he hen ne# e#er er on one e etitor  part pa rtic icip ipan antt in a ma mark rket et s has ha s mo more re re reso sour urce ces/ s/ 7:ort

k n , A n *

2  0  0  8  9  3  5  8 1 4

T e c h no l o

 gy ,a Gn u d er S c o i o c i T e r t y a v 2 e 0 r . 0 C 9o , py r i g ht T r a v e r . Pu bl i s he db y Fi f t hEdi t i on ,b yKenn et h Pr ent i c eHal l ,adi v i s i onof C.L L a a u u d d o o n na a n n d dC C a a r r o o l l Gu e r c i o Pe ar s o nEd uc a t i o n,I n c .

!-commerc e B u si n e ss odels

9+

competiti#e assets )hen they use their competiti#e ad#antages to In per"ectachie#e more ad#antage in mar;ets+ there aresurrounding markets. ,or   no competiti#einstance+ 6mazon(s mo#e into the ad#antages oronline   grocery business le#erages asymmetries the company(s huge customer  because all firmsdatabase and years of eha#e access to all the commerce eperience. factors of production 7including information and kno)ledge; e?ually. @o)e#er+ real markets are imperfect+ and asymmetries leading to competiti#e ad#antages do eist+ at least in the short term. ost competiti#e ad#antages are short term+ although some/such as the competiti#e ad#antage enjoyed by Coca-Cola because of the Coke brand name/can be sustained for #ery long periods. But not fore#erM Coke is increasingly being challenged by fruit+ health+ and uni?ue fla#or drinks. Companies are said to le6era#e their 

per"ect mar;et a market in )hich there are no competiti# e ad#antage s or asymmetri es because all firms ha#e e?ual access to all the factors of production

le6era# e )hen

a

company uses

its

competiti #e ad#antag es

to

achie#e more ad#antag e

in

surroundi ng markets

Mar;et !trate#&

        4         1         8         5         3         9         8         0         0         2

Eo matter ho) tremendous a firm(s ?ualities+ its marketing strategy and eecution are often just as

im por  tan t. 5h e be st bu

By partnering )ith siness concept+ or suppliers that could from idea+ )ill failbenefit if it is not ,reshDirect(s access to properly marketed toconsumers+ ,reshDirect is potential to customers. attempting !#erythi etend its ng you do tocompetiti#e promote your ad#antages. company(s ou5ube and products and:hotoBucket ha#e ser#ices toa social net)ork potential marketing strategy customers is)hich encourages kno)n asusers to post their  marketing. content on the Mar;et sites for free+ build strate#& ispersonal profile the plan youpages+ contact put together their friends+ and that detailsbuild a community. eactly ho)In these cases+ the you intend tocustomer is the enter a ne)marketing staffU market and attract ne)Or#ani=ational customers. /e6elopment :art of   6lthough many ,reshDirect(sentrepreneurial strategy+ for #entures are instance+ isstarted by one to de#elop#isionary close supplyindi#idual+ it is rare chain that one person partnerships alone can gro) an )ith gro)ersidea into a multiand million dollar   manufacturer company. In most s so itcases+ fast-gro)th purchases companies/ goods atespecially elo)er pricescommerce directly frombusinesses/need the source.employees and a 5his helpsset of business ,reshDirect procedures. In lo)er itsshort+ all firms/ prices forne)   ones in

par o ticu lar  C / o ne ed an org ani zati on to effi cie ntly imp lem ent thei r  bus ine ss pla ns an d str  ate gie s. a ny eco m me rce fir  ms an d ma ny tra diti on al fir  ms

es that hope to gro) and thri#e need to ha#e a plan for   or#ani=ational de6elopment that

describes ho) the company )ill organize the )ork that needs to be accomplished. 5ypically+ )ork is di#ided into functional departments+ such as production+ shipping+ marketing+ customer support+ and finance. $obs )ithin these functional areas are defined+ and then recruitment begins for specific  job titles and

ma r;e t str  ate #& the plan you put tog eth er that det ails ea ctly ho) you inte nd to ent er a ne) mar  ket and attr  act ne) cust om ers

or#ani=ational

com y

de6elopment

pan

plan describes ho) the

ECommer ce: Bu s i n es s , T e ch no l o gy , a ndSo c i e t y  2009,Fi f t h Ed i t i on,b y Ke n n et hC. Laudonand Ca r o l Gu er c i o Tr av er . Co p y r i g ht© 2009by Ke n n et hC. Laudonand Ca r o l Gu er c i o Tr av er . Pu b l i s h e db y Pr ent i c eHal l , adi v i s i onof Pe a r s o n Ed uc at i o n, I n c .

accomplished

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt C @ 6: 5! R 2 s 9, business may ha#e one resp marketing manager. But onsi after t)o or three years bilitie of steady gro)th+ that s. one marketing position 5ypi may be broken do)n cally+ into se#en separate jobs in done by se#en the indi#iduals. begi ,or instance+ eBay nnin founder :ierre Amidyar  g+ started an online gene auction site+ according ralist to some sources+ to s help his girlfriend trade mana#ement team employees of the )ho :!Q dispensers )ith company responsible for making the can other collectors+ but business model )ork perfo )ithin a fe) months the rm #olume of business had multi far eceeded )hat he ple alone could handle. *o task he began hiring people s are )ith more business hired eperience to help out. . 6s *oon the company had the many employees+ com departments+ and pany managers )ho )ere gro) responsible for   s+ o#erseeing the #arious recru aspects of the iting organization. beco Mana#ement Team mes

more spec ialize d. ,or  insta nce+ at the outs et+ a

 6rguably+ the single most important element of a business model is the mana#ement

team

responsible for making the model )ork. 6 strong management team gi#es a model instant credibility to outside in#estors+ immediate marketspecific kno)ledge+ and

e  !

5 C

5 h A u

2  0  0  8  9  3  5  8 1 4

T ec hnol

o g y G ,a u n e d r c S i o o T c r i e a v t y e2 r . 0 C 0o 9 p , y r i g ht T r a v e r . Pu bl i s he db y Fi f t hEdi t i on ,b yKenn et h Pr ent i c eHal l ,adi v i s i onof C.L L a a u u d do na a n n dC Ca r o lGu e r c i o Pe ar s o nEd uc a t i o n,I n c .

 a j o r B u s i n es s - t o - Co n s u me r 7 B2 C; B us in e ss  o dels

9

business model focuses on sales to the indi#idual consumer+ )hile in the case of  the e-distributor+ the business model focuses on sales to another business. 5he type of e-commerce technology in#ol#ed can also affect the classification of  a business model. -commerce+ for  instance+ refers to e-commerce conducted o#er )ireless net)orks. 5he e-tail business model+ for instance+ can also be used in mcommerce+ and )hile the basic business model may remain fundamentally the same as that used in the B2C sector+ it )ill nonetheless ha#e to be adapted to the special challenges posed by the mcommerce en#ironment. ,inally+ you )ill also note that some companies use multiple business models. ,or instance+ eBay can be considered as a B2C market maker. 6t the same time+ eBay can also be considered as ha#ing a C2C business model. If eBay adopts )ireless mobile computing+ allo)ing customers to bid on auctions from their cell phone or  )ireless "eb de#ices+ then eBay may also be described as ha#ing a B2C mcommerce business model. "e can epect many companies )ill ha#e closely related B2C+ B2B+ and m-commerce #ariations on their basic business model. 5he purpose )ill be to le#erage in#estments and assets de#eloped )ith one business model into a ne) business model. 2.2

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MA J O R B . !I N E ! !T O-

CON!.MER >B3C?p B.!INE!! MO/EL! e Business-to-consumer 7B2C; ecommerce+ in )hich online businesses seek to reach indi#idual consumers+ is the most )ell-kno)n and familiar type of ecommerce. Ta(le 34+ illustrates the major business models utilized in the B2C arena.

PORTAL such as ahoo+ *E"indo)s i#e+ and 6A offer  users po)erful "eb search tools as )ell as an integrated package of content and ser#ices+ such as ne)s+ e-mail+ instant messaging+ calendars+ shopping+ music do)nloads+ #ideo streaming+ and more+ all in one place. Initially+ portals sought to be #ie)ed as Fgate)aysG to the Internet. 5oday+ ho)e#er+ the portal business model is to be a destination site. 5hey are marketed as places )here consumers )ill )ant to start their "eb searching and hopefully stay a long time to read ne)s+ find entertainment+ and meet other  Portals

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y2 0 09, Fi f t hEd i t i o n,b yKe nn et hC. L au do nan dCa r o l Gu er c i oT r a v e r . Co p y r i g h t©2 0 0 9b yKe n n et hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s he db yPr e nt i c eHa l l ,a d i v i s i o no fP ea r s o nEd uc at i o n,I n c.

)ith 6585;/)hich in addition to being portals are also Internet *er#ice :ro#iders 7I*:s; that pro#ide access to the Internet and the "eb/add an additional re#enue streamM monthly subscription fees for  access.  6lthough there are numerous portalsearch engine sites+ the top fi#e sites 79oogle+ ahoo+ *E"indo)s i#e+ 6A+ and  6sk.com; gather more than <14 of the search engine traffic because of their superior brand recognition 7Eielsen Anline+

port al offers users po)e rful "eb searc h tools as )ell as an integr  ated packa ge of conte nt and ser#ic es all in one place

9*

C @ 6: 5! R 2

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

TABLE 34+

B3C B.!INE!! MO/EL!

B*IE!** AD!

6RI65IAE*

! S 6 :  ! * D ! * C R I : 5 I A E

:ortal

@orizontal9eneral

ahoo  6A *E

Content :ro#ider

5ransaction Broker

R!!E! AD!

Affers an integrated package of 6d#ertising+ content and content-search+ subscription fees+ ser#ices ne)s+ e-mail+ chat+ music transaction fees do)nloads+ #ideo streaming+ calendars+ etc. *eeks to be a user(s home base

ertical*pecialized *ailnet 7ortal;

Affers ser#ices and products to specialized marketplace

*earch

9oogle  6sk.com

,ocuses primarily on offering search  6d#ertising+ ser#ices affiliate referral

irtual erchant

6mazon

Anline #ersion of retail store+ )here *ales of goods customers can shop at any hour of  the day or night )ithout lea#ing their  home or office

Bricks-and-clicks

"almart.com *ears.com

Anline distribution channel for a

*ame

*ame

company that also has physical stores

Catalog erchant

Anline #ersion of direct mail catalog *ame Bean.com illianernon.com

anufacturer-direct

Dell.com attel.com *ony.com "*$.com *portline.com CEE.com !*:E.com RealRhapsody

anufacturer uses online channel to *ame sell direct to customer  

Information and entertainment

6d#ertising+

pro#iders such as ne)spapers+ sports subscription

sites+ and other online sources that fees+ affiliate offer customers up-to-date ne)s and referral fees special interest ho)-to guidance and tips andor information sales

!-5rade !pedia onster  5ra#elocity @otels.com Arbitz

:rocessors of online sales transactions+ 5ransaction fees such as stockbrokers and tra#el agents+

arket Creator 

eBay :riceline

"eb-based businesses that use 5ransaction fees Internet technology to create markets that bring buyers and sellers together 

*er#ice :ro#ider 

isaEo).com Dri#e.com

Community :ro#ider

iillage ,riendster   y*pace ,acebook  6bout.com

that increase customers( producti#ity by helping them get things done faster and more cheaply

Companies that make money by *ales of ser#ices selling users a ser#ice+ rather than inklaters Blue,lag a product *ites )here indi#iduals )ith particular   6d#ertising+ interests+ hobbies+ common eperiences+ subscription+ or social net)orks can come together  affiliate referral and FmeetG online fees

2  0  0  8  9  3  5  8 1 4

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n n et hC.L a u do na n dCa r o l Gu e r c i o T r a v er .Co py r i g ht©2 00 9b yK en n e t hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s hedbyPr ent i c eHal l ,adi v i s i onof Pe ar s o nEd uc a t i o n,I n c .

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2%%;. any of the top sites )ere among the first to appear on the "eb and therefore had first-mo#er ad#antages. Being first confers ad#antage because customers come to trust a reliable pro#ider and eperience s)itching costs if they change to late arri#als in the market. By garnering a large chunk of the marketplace+ first-mo#ers /just like a single telephone net)ork/can offer customers access to commonly shared ideas+ standards+ and eperiences 7something called network  that )e e"ternalities describe in later   chapters;. ahoo+ 6A+ *E"indo)s i#e+ and others like them are considered to be horizontal portals because they define their   marketspace to include all users of the Internet. ertical portals 7sometimes called #ortals; attempt to pro#ide similar  ser#ices as horizontal

portal s+ but are focus ed aroun d a partic ular  subje ct matte r or  mark et segm ent. ,or  insta nce+ *ailn et speci alizes in the cons umer  sailb oat mark et that conta ins about  millio n  6mer 

icans )ho o)n or rentp sailboats. 6lthough the total number of #ortal users may be 9 much lo)er than the number  5 of portal users+ if the market h segment is attracti#e enough+ ad#ertisers are )illing to pay a premium in order to reach a targeted audience. 6lso+ #isitors to specialized niche #ortals spend more money than the a#erage ahoo #isitor. 9oogle and 6sk.com can also be considered portals of a sort+ but currently focus primarily on offering search ser#ices. 5hey generate re#enues primarily from search engine ad#ertising sales and also from affiliate referral fees. ,or more information+ see Insig#t on Tec#nology$ Searc#% &!s% an!   &pps$ t#e 'uture for (oogle )an! Microsoft*.

E-TAILER Anline retail stores+ often called e-tailers+ come in all sizes+ from giant 6mazon to tiny local stores that ha#e "eb sites. !-tailers are similar to the typical bricksand-mortar storefront+ ecept that customers only ha#e to connect to the Internet to check their in#entory and place an order. *ome etailers+ )hich are referred to as Fbricks-and-clicks+G are subsidiaries or di#isions of  eisting physical stores and carry the same products. $C:enney+ Barnes 8 Eoble+ "al-art+ and *taples are four eamples of companies )ith complementary online stores. Athers+ ho)e#er+ operate only in the #irtual )orld+ )ithout any ties to

competiti#e+ ho)e#er. *ince (arriers to entr& 7the total cost of entering a ne) marketplace; into the "eb e-tail market are lo)+ tens of thousands of small e-tail shops ha#e sprung up on the "eb. Becoming profitable and sur#i#ing is #ery difficult+ ho)e#er+ for  e-tailers )ith no prior  brand name or eperi-

etailer 

onlin e retail store

(arri ers to entr& the total

cost of entering a ne) marketplace

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y  2009,Fi f t hEdi t i on,b y Kennet hC.LaudonandCar ol Gu er c i oT r a v er .Co py r i g ht© 2009byK en n e t hC.L a u do n a ndCa r o l Gu er c i oT r a v er . Pu bl i s he db yPr e nt i c eHa l l ,a d i v i s i o no fP ea r s o n Ed uc at i o n,I n c.

C @ 6: 5! R 2

97

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

IN!IGHT ON TECHNOLOG1 !EARCH% A/!% AN/ APP!) THE 2.T.RE 2OR GOOGLE >AN/ MICRO!O2T? muscle

or   014 of all

"hen the "eb )as first economics; )ill in#ented+ no one en#isaged play in the that by 2%% online search ultimate )ould gro) to a more than outcome. '&% billion dollar business. "here(s the In fact+ early pundits thought money in that online search )ould be a commodity business+

searchL

6

searches. icrosoft un#eiled its o)n proprietary search technology

related ?uestion in ,ebruary at best a small niche player in eis ho) many 2%%1+ and commerce. But in 2%%+ )ith paid search engines has made search spending comprising more than )ill remain some >%4 of the .*. online ad#ertising )hen the progress at market+ and paid search ad spending competition is the epense gro)ing at around 2%4 a year o#er the o#er. of ahoo past se#eral years+ the search engine 5oday+ fi#e and market is booming+ along )ith the larger  "eb sites  6sk.com. Internet ad#ertising marketplace no) account for   estimated at about '2K billion. 6bout o#er <14 of all 14 of Internet users in the nited "eb searchesM *tates use a search engine at least 9oogle once during a month. 5he top ten search 71<.34;+ ahoo engines in ay 2%% conducted an 7&K.<4;+ estimated 0. billion searches+ an a#erage of about 21% million a day. Eo *E"indo)s *earch one kno)s the ultimate demand for i#e search on the "eb+ but as the cost 7both 7&3.34;+ 6A of7>.&4;+    6sk.com searching declines+ and the po)er of  search engines increases+ it is no)72.&4;. in

terms

of

money

and

time;

and 5he

apparent that search )ill be a major real "eb-based industry dri#en in large partpo)erhouses of  by ad#ances in technology. "hat is less search apparent is )ho eactly )ill dominate9oogle roleahoo+ technology 7as opposed to marketingpro#ide this

marketspace

and

)hat

are and )hich o#er 

 6 A f   e

2  0  0  8  9  3  5  8 1 4

7continued;

e :Bu s i n es s ,T e c hn ol o gy , a ndSo c i e t y2 00 9,Fi f t h Ed i t i o n,b yKe nn e t hC.L au d onan d Ca r o l Gu er c i oT r a v er .Co py r i g ht© 2009byKennet hC.Laudonand Ca r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr en t i c eHal l ,adi v i s i onofPear s on Ed uc at i o n,I n c.

 a j o r B u s i n es s - t o C o n su m e r 7 B 2C ; B u s i n es s  o d el s

98         4         1         8         5         3         9         8         0         0         2

business through superior soft)are technology+ highly

a

efficient

computer  hard)are architecture+ and ecellent "eb site design.

9oogle

)as

started

&<<

by

in t)o

enterprising *tanford

grad

NOT *ergey AVAstudents+ I LABL EFO R Brin and arry ELE CTRO )ho )ere :age+ NI C studying data VI EWI NG

mining and process

the

of  

analyzing data for  patterns.

5hat

research

later 

became the basis of their business+ 9oogle+

)hich

a top ranking+ can search and then pay millions of "eb only )hen pages in less than they recei#ed a second. !arly a click. search engines 9o5o.com like 6lta ista gre) to 7)hich once had become <%4 of the search A#erture.com market; merely and in a fe) counted ho) years many times a e?ualed the search term size of   appeared on a 9oogle. gi#en "eb page A#erture )as to determine purchased by )here to rank a ahoo in particular page. If  2%%3. you searched on 9oogle

achie#ed early

its and

po)erful lead in th

h

Fi:hone+G

6lta

ista )ould sho) you pages ranked in terms of the

number of times the "eb site(s

to one another 

proliferation

home

on

page+

se#eral

other  

fonts+

heading+

smaller

but

and

tet

popular

search

page+

contained

and

the

other

)ord

pages+

Fi:hone.G

9oogle(s search+ on the other hand+

the

of  

uses the popularity of "eb pages asmostnearby importantpages. crite5he company the ria for ranking pages+

of 

engines such as  6A

7>4

of 

uses a number  searches; and as )ell as the page of 5hesoft)are  6sk.com 724 of  con-tent. more to searches;. 5he otheralgorithms "eb pages link carry outpage+ each to a particular search+ dra)ing the higher it jumps in on the po)er of  9oogle(s ranking an undisclosed structure called :agenumber of   Rank. 5his is called ser#ers Flink analysisG and is 7rumored to be run independently of any)here from the ?uery being made. &%%+%%% to Ance all the "eb(s >1%+%%%; indeed pages are located in ranked+ 9oogle also ser#er FfarmsG factors in other through-out the informa-tion+ such as )orld. *ome the tet content of a people belie#e page+ its link 9oogle has the s

largest

t

computing )orld. It is unclear  9oogle

can

maintain

its

technological edge in search gi#en

the

in#estments being made by both ahoo and icrosoft+ )ell

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y2 0 09, Fi f t hEd i t i o n,b yKe nn et hC. L a u do nan dCa r o lGu e r c i o T r a v er .Co py r i g ht©2 00 9b y Ke n n et hC.L a u do nan dCa r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr ent i c eHal l ,adi v i s i onof Pe ar s o nEd uc a t i o n,I n c .

:ageRank patent is

o)ned

by

*tanford ni#ersity+ )here it

)as

and

created+

epires

in

2%&0. arry :age and *ergey Brin ha#e an eclusi#e license until 2%&&+ after )hich time their license is not eclusi#e.

5he

#alidity

of

that

patent

has

not

been tested and

system in the

if

original

as

there are )ays to design around it. 5he

concept

of 

analyzing a social net)ork+

and

ranking

the

Finfluence

of  

participantsG

in

terms recei#es

of

)ho and

sends the most

as the

7continued;

7:

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

C @ 6: 5! R 2 most of are

these FAfficeG

applications )here icrosoft currently has a communications 7links; is hardly near monopoly. original to 9oogle+ but instead )as a "here to put basic insight of sociologists in the 9oogle(s '&.K1 &<1%s )ho studied commu-nities as billion purchase social net)orks. In the competition of ou5ubeL among search engines+ it is clear that "all *treet search alone is not the key ingredient+ analysts ha#e  just the foun-dation for the )inning had a tough time hand. It(s a necessary but not )ith this sufficient condition for success. 9oogle(s strategy has been to etend its ad#antages in search into t)o areas and try to Fout-in#entG the competition. 5hese ne) areas are ad#ertising and applicationsM in the )ords of C!A !ric *chmidt+ 9oogle is all about Fsearch+ ads+ and apps.G It has etended search to include images+ books+ scholars+ content+ finance+ and ne)s. It has etended its ad#ertising ser#ices through its  6d"ords and 6d*ense programs.  6d"ords is an auction program that allo)s ad#ertisers to bid for  placement on 9oogle pages.  6d*ense allo)s 9oogle to place ads on publisher "eb sites 7basically any "eb site is a FpublisherG "eb site; based on the content of that site(s "eb pages. Ather ser#ices include 9oogle 9eo 7maps+ !arth+ and local content;+ and 9oogle Checkout 7an online )allet;. 9oogle is also starting to push into

icrosoft(s

applications

territory

market.

in

the

9oogle(s

applications include 9mail+ Docs and *preadsheets+ Arkut

7a

Calendar+ social

9roups+

?uestion too. ou5ube is all threeM it(s an online application for  storing and sharing #ideos it(s a search system for   #ideos and it(s an ad#ertiser(s dream come trueM according to com*core+ nearly % million users )atched more than 3 billion user posted #ideos in $anuary 2%%. "hile 9oogle(s soft)are applications may be popular+ they ha#e not yet turned into big money makers+ and icrosoft still Fo)nsG <14 of the )orld(s :C office en#ironment. 6lmost all 7<<4; of   9oogle(s re#enue still comes from search and ad#ertising

net)orking

7including

en#ironment;+ and Blogger. In case

 6d"ords

you(#e missed the last t)o decades+

and

)hile icrosoft has in#ested billionsthe Department de#eloping its o)n search engine+ so of $ustice as far it has gained only at the epense Fantiof 6A and 6sk.com+ and seems competiti#e.G 6 stuck at about &34-&>4 of the market month later+ 7an impro#ement o#er pre#ious years icrosoft bought

among monopolists and oligopolistsU

)hen it )as belo) &%4;. 9oogle has aHuanti#e for 'K increased its share of search a bit to billion+ the 134 from 1&4. largest purchase In a Flife imitates artG moment+ in icrosoft both companies purchasedhistory. !arlier in ad#ertising net)orks to help target2%%K+ it bought banner ads )ithin a month of one in-game another. 9oogle bought DoubleClick ad#ertising for '3.& billion in 6pril 2%%0+ and pioneer assi#e

among

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 a j o r B u s i n es s - t o C o n su m e r 7 B 2C ; B u s i n es s  o d el s

75

        4         1         8         5         3         9         8         0         0         2

ence. 5he e-tailer(s challenge is differentiating its business from eisting stores and "eb sites. Companies that try to reach e#ery online consumer are likely to deplete their resources ?uickly. 5hose that de#elop a niche strategy+ clearly identifying their  target market and its needs+ are best prepared to make a profit. =eeping epenses lo)+ selection broad+ and in#entory controlled are keys to success in e-tailing+ )ith in#entory being the most difficult to gauge. Anline retail is co#ered in more depth in Chapter <. CONTENT PROI/ER

 6lthough there are many different )ays the Internet can be useful+ Finformation content+G )hich can be defined broadly to include all forms of intellectual property+ is one of the largest types of Internet usage. Intellectual propert& refers to all forms of human epression that can be put into a tangible medium such as tet+ CDs+ or the "eb 7,isher+ &<<<;. Content distribute pro6iders 

infor  matio n conte nt+ such as digita l #ideo + musi c+ photo s+ tet+ and art)o rk+ o#er  the "eb.  6cco rding to the Anlin e :ubli shers  6sso ciatio n+ in 2%%1+ .*. cons umer  s spent '2 billio n for  onlin e conte

nt 7Anline :ublishers)  6ssociation+ 2%%K;. *ince then+ digital music+ mo#ies+ 9 and tele#i-sion ha#e become e * an increasingly important o part of the market+ and are epected to generate o#er  '3.K billion in re#enues alone during 2%% 7earketer+ Inc. 2%%0b 2%%0c author estimates;. Content pro#iders make money by charging a subscription fee. ,or   instance+ in the case of  Real.com(s Rhapsody nlimited ser#ice+ a monthly subscription fee pro#ides users )ith access to thousands of song tracks. Ather content pro#iders+ such as "*$.com 7 T#e Wall  Street -ournal.s  online ne)spaper;+ /arar!  Business Reiew + and many others+ charge customers for  content do)nloads in addition to or in place of a subscription fee. icropayment systems technology pro#ides content pro#iders )ith a costeffecti#e method for   processing high #olumes of  #ery small monetary transactions 7any)here from '.21 to '1.%% per transaction;. icropayment systems ha#e greatly enhanced the re#enue model prospects of  content pro#iders )ho )ish to charge by the do)nload. Af course+ not all online content pro#iders charge for  their informationM just look at *portsline.com+ CIA.com+ CEE.com+ and the online #ersions of many ne)spapers and magazines. sers can access ne)s and

ho)e#er+ do not o)n content+ but syndicate 7aggregate; and then distribute content produced by others. Syn!ication is a major  #ariation of the

intelle ctual proper  t&

refers to all forms of human epres sion that can be put into a tangibl e mediu m such as tet+ CDs+ or the "eb conten t pro6id er

distribut es informa tion content + such as digital ne)s+ music+ photos+

#ideo+ and art)ork+ o#er the "eb

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y  2009,Fi f t hEdi t i on,b y Kennet hC.Laudonand Ca r o lGu er c i oTr a v er . Co p y r i g h t©2 0 0 9b yKe n n et h C.L a u do na n dCa r o lGu e r c i o T r a v e r . Pu bl i s he db yPr e nt i c e Ha l l ,adi v i s i onofPe ar s on Ed uc at i o n,I n c.

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt C @ 6: 5! R 2 s 73 egation ser#ices. ,or  instance+ *hopping.com stan collects information on dard the prices of thousands cont of goods online+ ent analyzes the pro#i information+ and der  presents users )ith mod tables sho)ing the el. range of prices and  6not "eb locations. her  *hopping.com adds #aria #alue to content it tion aggregates+ and re-sells here this #alue to ad#ertis-ers is )ho ad#ertise on its site "eb 7adnick and *iegel+ aggr  2%%&;. transaction (ro;er site that processes egat transactions for consumers that are  6ny e-commerce ors+ normally handled in person+ by phone+ or  startup that intends to )ho by mail make money by colle pro#iding content is ct likely to face difficulties infor  unless it has a uni?ue mati information source that on others cannot access. from ,or the most part+ this a business category is )ide dominated by traditional #arie content pro#iders. ty of  Anline content is sour  discussed in further  ces depth in Chapter and &%. then add TRAN!ACTION #alu BRO0ER e to *ites that process that transactions for   infor  consumers normally mati handled in person+ by on phone+ or by mail are throu transaction (ro;ers. gh 5he largest industries postusing this model are aggr  financial ser#ices+ tra#el

s 9 5 C o

2  0  0  8  9  3  5  8 1 4

T ec hnol

o g y G ,a u n e d r c S i o o T c r i e a v t y e2 r . 0 C 0o 9 p , y r i g ht T r a v e r . Pu bl i s he db y Fi f t hEdi t i on ,b yKenn et h Pr ent i c eHal l ,adi v i s i onof C.L L a a u u d do na a n n dC Ca r o lGu e r c i o Pe ar s o nEd uc a t i o n,I n c .

 a j o r B u s i n es s - t o C o n su m e r 7 B 2C ; B u s i n es s  o d el s

epensi#e marketing campaigns and )ere )illing to pay up to '>%% to ac?uire a single customer. @o)e#er+ online brokerages are no) in direct competition )ith traditional brokerage firms )ho ha#e joined the online marketspace. *ignificant consolidation is occurring in this industry. 5he number  of job sites has also multiplied+ but the largest sites 7those )ith the largest number of job listings; are pulling ahead of  smaller niche companies. In both industries+ only a fe)+ #ery large firms are likely to sur#i#e in the long term. MAR0ET CREATOR Mar;et creators build

a digital en#ironment in )hich buyers and sellers can meet+ display products+ search for products+ and establish prices. :rior to the Internet and the "eb+ market creators relied on physical places to establish a market. Beginning )ith the medie#al marketplace and etending to

7+

today(s Ee) ork *tock !change+ a market has meant a physical space for transacting. 5here )ere fe) pri#ate digital net)ork marketplaces prior to the "eb. 5he "eb changed this by making it possible to separate markets from physical space. 6 prime eample is :riceline+ )hich allo)s consumers to set the price they are )illing to pay for   #arious tra#el accommodations and other products 7sometimes referred to as a re#erse auction; and eBay+ the online auction site utilized by both businesses and consumers. ,or eample+ eBay(s auction business model is to create a digital electronic en#ironment for buyers and sellers to meet+ agree on a price+ and transact. 5his is different from transaction brokers )ho actually carry out the transaction for their  customers+ acting as agents in larger   markets. 6t eBay+ the buyers and sellers are their o)n agents. !ach sale on eBay nets the company a commission based on the percentage of the item(s sales price+ in

a d d it i o n t o a li s ti n g f  e e . e B a y i s o n e o f  t h e f  e ) " e b s it e s t h a

t has been profitable #irtually from the beginning. "hyL Ane ans)er is that eBay has no in#entory or  production costs. It is simply a middleman. 5he market opportunity for market creators is potentially #ast+ but only if the firm has the financial resources and marketing plan to attract sufficient sellers and buyers to the marketplace. 6t the end of $une 2%%+ eBay had about >.1 million acti#e users+ and this makes for an efficient market 7eBay+ 2%%;. 5here are many sellers and buyers for each type of product+ sometimes for the same product+ for eample+ laptop computer models. Ee) firms )ishing to create a market re?uire an aggressi#e branding and a)areness program to attract a sufficient critical mass of   customers. *ome #ery large "eb-based firms such as 6mazon ha#e le#eraged their  large customer base and started auctions. any other digital auctions ha#e sprung up in smaller+ more specialized #ertical market segments such as je)elry and automo-biles. In addition to

        4         1         8         5         3         9         8         0         0         2

branding+ a company(s management team and organization can make a difference in creating ne) markets+ especially if some managers ha#e had eperience in similar  businesses. *peed is often the key in such situations. 5he ability to become operational ?uickly can make the difference bet)een success and failure.

m a r  ; e t c r  e a t o r 

b u i l d s a d i g i t a l en#iron ment )here buyers and sellers can meet+ display product s+

search for products+ and establish a

price for products

T e c hn ol o gy , a ndSo c i e t y  2009,Fi f t hEdi t i on,by ECo mme r c e :Bu s i n e s s,

Kennet hC.Laudonand Ca r o lGu er c i oT r a v e r .

Cop9b yKennet hC.Laudonand y r i g Ca r o lGu er c i oT r a v er .Pu bl i s he d h t© b yPr en t i c eHa l l ,ad i v i s i onof 200 Pe ar s o nEd uc a t i o n,I n c .

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt C @ 6: 5! R 2 s 7, fer ser#ices online. 5here(s been an ! E eplosion in online R ser#ices that is often ser6ice pro6ider offers ser#ices online  unrecognized. "eb 2.% I applications such as C photo sharing+ #ideo E sharing+ and userP generated content 7in R blogs and social O  net)orking sites; are all I ser#ices pro#ided to / customers. 9oogle has E led the )ay in R de#eloping online " applications such as hil 9oogle aps+ 9oogle e Docs and e*preadsheets+ and ta 9mail. 5hink,ree and ile Buzz)ord are online rs alternati#es to icrosoft s "ord pro#ided as ell ser#ices 7rather than pr  boed soft)are/a o product;. ore personal d ser#ices such as online u medical bill ct management+ financial s and pension planning+ o and tra#el nli recommender sites are n sho)ing strong gro)th. e+ *er#ice pro#iders s use a #ariety of re#enue er  models. *ome charge a 6i fee+ or monthly c subscriptions+ )hile e others generate pr  re#enue from other  o sources+ such as 6i through ad#ertising and d by collecting personal er  information that is s useful in direct of 

m a A 5 h &

,

2  0  0  8  9  3  5  8 1 4

e :Bu s i n es s ,T e c hn ol o gy , a ndSo c i e t y2 00 9,Fi f t h Ed i t i o n,b yKe nn e t hC.L au d on a ndCa r o l Gu er c i oT r a v er . Co p y r i g h t©2 0 0 9b yKe n n et hC. L a u do nan dCa r o lGu e r c i o T r a v e r . Pu bl i s he db yPr e nt i c e Ha l l ,adi v i s i onofPe ar s on Ed uc at i o n,I n c.

 a j o r B u s i n es s - t o C o n su m e r 7 B 2C ; B u s i n es s  o d el s

7         4         1         8         5         3         9         8         0         0         2

increasing demand for  con#enience products and ser#ices bodes )ell for current and future online ser#ice pro#iders. arketing of ser#ice pro#iders must allay consumer fears about hiring a #endor online+ as )ell as build confidence and familiarity among current and potential customers. Building confidence and trust is critical for ser#ice pro#iders just as it is for  retail product merchants. =odak+ for instance+ has a po)erful brand name o#er  a century old+ and has translated that brand into a trusted online pro#ider of  photo ser#ices. In the process+ =odak is transforming itself from a products-only company 7cameras and paper; into a more contemporary digital ser#ices company. COMM.NIT1 PROI/ER

 6lthough community pro#iders are not a ne) entity+ the Internet has made such sites for likeminded indi#iduals to meet and con#erse much easier+ )ithout the limitations of geography and time to hinder   participation. Communit&

pro6iders

are sites that create a digital online en#ironment

inter  ests can trans act 7buy and sell good s; shar  e inter  ests+ phot os+ #ideo s com muni cate )ith likemind ed peopl e recei #e inter  estrelat ed infor  matio n and e#en play out fanta sies by adop ting onlin e

personalities called a#atars.t 5he social net)orking sites C y*pace+ ,acebook+ ,riendster+ and hundreds of o other smaller+ niche sites such as Doostang+ 5)itter+ and *ports#ite+ all offer users community building tools and ser#ices. 5he basic #alue proposition of community pro#iders is to create a fast+ con#en-ient+ one-stop site )here users can focus on their most important concerns and interests+ share the eperience )ith friends+ and learn more about their o)n interests. Community pro#iders typically rely on a hybrid re#enue model that includes subscription fees+ sales re#enues+ transaction fees+ affiliate fees+ and ad#ertising fees from other firms that are attracted by a tightly focused audience. Community sites such as iillage make money through affiliate relationships )ith retailers and from ad#ertising. ,or instance+ a parent might #isit Babystyle for tips on diapering a baby and be presented )ith a link to @uggies.com if the parent clicks the link and then makes a purchase from @uggies.com+ Babystyle gets a commission. ike)ise+ banner ads also generate re#enue. 6t 6bout.com+ #isitors can share tips and buy recommended books from 6mazon+ gi#ing  6bout.com a commission on e#ery purchase. *ome of the oldest communities on the "eb are "ell.com+ )hich

o#er

time

many

succeeded.

ha#e Ee)er  

community sites such as ,acebook

and

y*pace

may not be profitable at this time+ but they are ?uickly de#eloping re#enues

ad#ertising as

their

main

a#enue of re#enue. Both the #ery large social net)orking sites

7y*pace

and

,acebook each ha#e o#er  &%% million profiles; as

comm unit& pro6id er

sites that create a digital online en#iro nment )here people )ith similar interes ts can transa ct 7buy and sell goods;  share interes ts+ photos + and #ideos comm unicate )ith likeminde d people  and recei#e

interest-related information

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y  2009,Fi f t hEdi t i on,b y Kennet hC.LaudonandCar ol Gu er c i oT r a v er .Co py r i g ht© 2009byK en n e t hC.L a u do n a ndCa r o l Gu er c i oT r a v er . Pu bl i s he db yPr e nt i c eHa l l ,a d i v i s i o no fP ea r s o n Ed uc at i o n,I n c.

7*

C @ 6: 5! R 2

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

)ell as niche sites )ith smaller dedicated audiences are ideal marketing and ad#ertising territories. 5raditional online communities such as the "ell+ iillage+ and "ebD 7)hich pro#ides medical information to members; find that breadth and depth of kno)l-edge at a site is an important factor. Community members fre?uently re?uest kno)l-edge+ guidance+ and ad#ice. ack of eperienced personnel can se#erely hamper the gro)th of a community+ )hich needs facilitators and managers to keep discussions on course and rele#ant. ,or the ne)er community social net)orking sites+ the most impor-tant ingredients of success appear  to be ease and fleibility of use+ and a strong customer #alue proposition. ,or instance+ ,acebook has rapidly gained on its ri#al y*pace by encouraging users to build their  o)n re#enue-producing applications that run on their profiles+ and e#en take in ad#ertising and affiliate re#enues.

Anline communities benefit significantly from offline )ord-of-mouth+ #iral marketing. Anline communities tend to reflect offline relationships. "hen your friends say they ha#e a profile on ,acebook+ and ask you to #isit+ you are encouraged to build your o)n online profile. ducts and ser#ices directly to indi#idual businesses 2.3

M

edis tri (ut or 

A

a

R

J O

com pan y that

B

sup

.

plie

!

s pro

I

ag ent B.!INE!! s ca >B3B? n B.!INE!! se arc MO/EL! h In Chapter &+ )e noted that by business-to-business 7B2B; e-typ commerce+ in )hich businesses sell e to other businesses+ is more than of  ten times the size of B2C e- pro commerce+ e#en though most of the du public attention has focused onct+ B2C. ,or instance+ it is estimated suc that re#enues for all types of B2C e- h commerce 7including spending onas online leisure tra#el and digital mo content; in 2%% )ill total aroundtor  '21 billion 7earketer+ Inc.+ 2%%b;+ s+ com-pared to o#er '3. trillion for all @ types of B2B e-commerce in 2%% 6C 7.*. Census Bureau+ 2%%;.+ or  Clearly+ most of the dollar re#enues flui in e-commerce in#ol#e B2B e-ds+ commerce. uch of this acti#ity is or  unseen and unkno)n to the a#erage by sp consumer. ecif  Ta(le 34, lists the major business models utilized in ic the B2B arena. bra nd E-/I!TRIB.TOR na Companies that supply productsme and ser#ices directly to indi#idual.

NE!!-TO-

! businesses are e-distri(utors . ".". 9rainger+ for eample+ is the largest distributor of maintenance+dist repair+ and operations 7RA;ribu supplies. RA supplies aretors thought of as indirect inputs to the are production process/as opposedo) to direct inputs. In the past+ned 9rainger relied on catalog salesby and physical distribution centers inone metropolitan areas. Its catalog of co e?uipment )ent online in &<<1 atmp 9rainger.com+ gi#ing businessesany access to more than 3%%+%%%see

king to ser#e many customers. as

)ith

@o)e#er+ echanges

7described on the net page;+ critical mass is a factor.

"ith

e-

distributors+ the more products and ser#ices a

company

makes

a#ailable on its site+ the more attracti#e that site is

to

potential

customers. shopping

Ane-stop is

al)ays

preferable to ha#ing to #isit numerous sites to locate a particular part or product.

e :Bu s i n es s ,T e c hn ol o gy , a ndSo c i e t y2 00 9,Fi f t h Ed i t i o n,b yKe nn e t hC.L au d onan d Ca r o l Gu er c i oT r a v er .Co py r i g ht© 2009byKennet hC.Laudonand Ca r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr en t i c eHal l ,adi v i s i onofPear s on Ed uc at i o n,I n c.

 a j o r B u s i n es s - t o - Co n s u me r 7 B2 B; B us in e ss  o dels

TABLE 34,

79

B3B B.!INE!! MO/EL!

B  * I E ! ** . A D ! 

! S6 : ! *

D!*CRI:5IAE

R !  ! E !  A D !

*ingle-firm online #ersion of retail and )holesale store supply

*ales of goods

) 0 *  1 T M & R 2 1 T P 3 & C 1 

!-distributor

9rainger.com :artstore.com

maintenance+ repair+ operation goods

!-procurement

6riba :erfectcommerce

indirect inputs *ingle firm creating digital markets )here sellers and buyers transact for indirect inputs

!change

,arms.com ,oodtrader

Independently o)ned #ertical digital marketplace for direct inputs

,ees for market-making ser#ices supply chain management+ and fulfillment ser#ices ,ees and commissions on transactions

Industry Consortium

!lemica !ostar Huadrem

Industry-o)ned #ertical digital market open to select suppliers

,ees and commissions on transactions

Cost absorbed by net)ork o)ner and reco#ered through production and distribution efficiencies Contributions from industry member firms and reco#ered through production and

) 4 * P R I 5 & T 1 I + 6 7 S T R I & 3 + 1 T W 8 R 2 

*ingle firm

"al-art :roctor 8 9amble

Company-o)ned net)ork to coordinate supply chains )ith a limited set of partners

Industry-)ide

& *EC  6gentrics

Industry-o)ned net)ork to set standards+ coordinate supply and logistics for the industry

distribution efficiencies fees for  transactions and ser#ices.         4         1         8         5         3         9         8         0         0         2

E-PROC.REMENT $ust as e-distributors pro#ide products to other companies+ eprocurement

"irms

create and sell access to digital electronic markets. ,irms such as  6riba+ for instance+ ha#e created soft)are that helps large firms organize their   procurement process by creating mini-digital

mark ets for a singl e firm.  6rib a creat es cust om integ rated onlin

catalogs 7)here supplier firms can f  list their offerings; for purchasing e firms. An the sell side+ 6riba helps #endors sell to large purchasers by pro#iding soft)are to handle catalog creation+ shipping+ insurance+ and finance. Both the buy and sell side soft)are is referred to generically as F#alue chain managementG soft)are. B3B ser6ice pro6iders make

money through transaction fees+

to Intern e-procurement "irm creates

and sells access to digital

Fi f t hEd i t i o n,b yKe nn et hC. L au do nan dCa r o l Gu er c i oT r a v e r . Co p y r i g h t©2 0 0 9b yKe n n et hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s he db yPr e nt i c eHa l l ,a d i v i s i o no fP ea r s o nEd uc at i o n,I n c.

based soft)

electronic markets

are applic

B3B

ser6ice

pro6ider 

sells business ser#ices to other firms application ser6ice pro6ider >A!P?

a company that sells access

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y2 0 09,

et-

ations to other comp anies

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt C @ 6: 5! R 2 s 77 -cost production firms systems 7such as scale economies efficiencies muc factories or soft)are that arise from increasing the h systems; can be size of a business lo)e operated at full capacity r  )ith no idle time. In the costs case of soft)are+ the of  marginal cost of a digital soft) copy of a soft)are are program is nearly zero+ by and finding additional achi buyers for an epensi#e e#in soft)are program is g eceptionally profitable. e@c$an#e scale 5his is much more an independent digital electronic econ efficient than ha#ing marketplace )here suppliers and omie e#ery firm build its o)n commercial purchasers can conduct s. supply chain transactions !cal management system+ e and it permits firms such econ as 6riba to specialize omie and offer their soft)are s are to firms at a cost far less effici than the cost of   enci de#eloping it. es ECHANGE! that resul !changes ha#e garnered t most of the B2B attention from and early funding because incre of their potential market asin size e#en though today g the they are a small part of the size o#erall B2B picture. 6n of a e@c$an#e is an busi independent digital ness electronic marketplace + for  )here hundreds of   insta suppliers meet a smaller  nce+ number of #ery large )he commercial purchasers industr& consortia industry-o)ned n 7=aplan and *a)h-ney+ #ertical marketplaces that ser#e large 2%%%;. !changes are specific industries + o)ned by independent+ fied usually entrepreneurial

b u

I n I I n

2  0  0  8  9  3  5  8 1 4

T ec hnol

        4         1         8         5         3         9         8         0         0         2

o gy G , a u n e d r c S i o o c T i r e a t v y e r 2 . 0 C 0o 9 p , y r i g ht T r a v e r . Pu bl i s he db y Fi f t hEd i t i on,b yKenn et h Pr ent i c eHal l ,adi v i s i onof C.L L a a u u d d o o n na a n n d dC Ca a r r o o l l Gu e r c i o Pe ar s o nEd uc a t i o n,I n c .

preneur 9lenn Ballman+ An#ia started out as a market hub or echange aimed at helping the &1 million small businesses in 6merica shop for the best deals on products and ser#ices. *tarting out at home+ Ballman created a "eb site )here small businesses could buy and sell products+ access small business information+ and purchase business soft)are. Ariginally called egadepot.com+ in &<< Ballman mo#ed to *eattle in part to attract #enture capital funding+ and renamed the company An#ia.com 7in atin+ Fon the roadG;. 6fter se#eral rounds of #enture capital in#estment that accumulated to more than '0& million in &<<<+ An#ia )ent public in arch 2%%%+ at the offering price of  '2&+ raising an addition '2>% million. By 2%%%+ An#ia had o#er a million small and business users+ thousands of suppliers+ and also had built strategic relationships )ith isa and 6A to build co"eb sites branded for the small business market. But the remained company unprofitable

I N ! I G H T O N B . ! I N E ! ! ONIA EOLE!

because+ many anges+ attract enough suppliers compete against one another in an open

like so other echit could not )illing

ECo mme r c e :Bu s i n e s s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,b y Ke n ne t hC.L a ud o na n dCa r o lGu e r c i oT r a v e r .Co p y r i g h t©2 0 09b y Ke nn et hC.L au do na ndCa r o l Gu er c i oTr a v er .Pu bl i s h edbyPr e nt i c eHa l l , adi v i s i o no fP ea r s o nEd uc at i o n,I n c.

to

achie#ed a profitable le#el. By Dece An#ia had laid off o#er 2%% employe stock sank to '&+ the delisting price fo E6*D6H. Eot one to gi#e up easily+ found initiated a reco#ery plan. @e sold online purchasing of soft)are+ har  business products to a competitor+ Corporation+ retaining only the An#i ment net)ork that matches buyers a 5hen the company completely s)itch from the small business ser#ice market ernment procurement and ser#ice ma ne) marketspace+ An#ia planned procurement ser#ices to local+ state+ go#ernment agencies and feed sales le businesses )anting to ser#e th

NOTAVAI LABLEFOR ELECTRONI CVI EWI NG

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

C @ 6: 5! R 2

8:

approimately '&.2 million.  6ccording to ices+ by In arch 2%%&+ An#ia purchased licensing its Demand*tar Inc.+ a leading pro#ider of  content to buyer-side business-to-go#ernment third parties platforms that had o#er 20% )ho then

ike An#ia(s

go#ernment agency subscribers. In

#ery pleased )ith its progress. In 2%%. An#ia

resell

$une

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:roject9uides+

Chairman and Chief !ecuti#e Affice+ An#ia is

the

An#ia the

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online bid gathering and distributiontom

 jumped from &2%th to 2Kth in

market ser#ice. 5his ac?uisition permitted theinformation company to greatly increase the flo) of reports. bids from agencies into the 5he

the *eattle 5imes

marketplace. It also began compiling achanges in its proprietary database+ called An#iabusiness model Dominion+ that no) contains 1 millionha#e enabled procurement records+ 201+%%% #endor An#ia to regain profiles+ and co#erage of more thanstability+ although 0+%%% go#ernment purchasing offices

it is not yet profitable. During introduced An#ia Business Builder+ a the period from nation)ide. In 2%%1+ the company business intelligence tool that allo)s companies to mine the An#ia Dominion

2%%2 to 2%%0+ re#enue almost

database for information rele#ant to

tripled+ from '0 million to o#er  An#ia Ea#igator+ an enhanced search '2% million+ and their business+ and in 2%%K+ added tool for the database. In ,ebruary 2%%+ An#ia

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trading consortia ha#e echange fortended the to be ECo mme r c e :Bu s i n e s s ,T e c h no l o g y , aerospace more and and e t y defense successful thanSoci  2009, industry+ independent Fi f t h t i on, founded by B6! echanges inEdi b y *ystems+ part because K en n e t h Boeing+ they areC. ockheed sponsored byLaudon and artin+ po)erful+ deep-Carol Raytheon+ pocketed and Gu er c i o T r a ver . Rolls-Royce industry in Co py r i g h 2%%%. !ostar  players+ andt©2009 connects also )ith becauseby K en n e t h o#er 3%% strengthenC. they procurementtraditional Laudon and systems in purchasing 2% Car o l different beha#ior rather  Gu er c i o T r a v e r . countries than and seek to Pu bl i s he has registered transform it. db y more than Pr e nt i c e H a l l , a >%+%%% trading di v i s i on partners of P e a r s o n )orld)ide. 2  0  0  8  9  3  5  8 1 4

Ed uc at i o n,I nc .

 a j o r B u s i n es s - t o - Co n s u me r 7 B2 B; B us in e ss  o dels

85

PRIATE IN/.!TRIAL NET
Pri6ate industrial net'or;s 7sometimes referred to as priate tra!ing e"c#anges or 

constitute about 014 of all B2B ependitures by large firms and far eceed the ependitures for  all forms of Eet marketplaces. :ri#ate industrial net)orks are digital net)orks 7often but not al)ays Internet-based net)orks; designed to coordinate the flo) of  communications among firms engaged in business together. ,or instance+ "alart operates one of  the largest pri#ate industrial net)orks in the )orld for its suppliers+ )ho on a daily basis use "alart(s net)ork to monitor the sales of  their goods+ the status of shipments+ and the actual in#entory le#el of their goods. B2B ecommerce relies o#er)helmingly on a technology called electronic data interchange 7!DI; 7.*. Census Bureau+ 2%%;. !DI is useful for one-to-one relationships bet)een a single supplier and a single purchaser+ and originally )as PT9s*

desi gne d for  prop rieta ry net) orks+ altho ugh it is migr  ating rapi dly to the Inter  net. an y firms ha#e beg un to supp leme nt their  !DI syst ems+ ho) e#er+ )ith mor  e po) erful "eb tech nolo gies

that can enable many-to-one+ f  instance+ 6gentrics is an pri#ate and many-to-many market i industry-)ide I industrial net)ork for  relationships )here there are n retailers and suppliers many suppliers selling to a single designed to facilitate or small group of #ery large purchasers+ or+ in the case of  and simplify trading independent echanges+ there among retailers+ may be many sellers and many suppliers+ partners+ and buyers simultaneously in the distributors. 6gentrics( marketplace. !DI is not designed members currently for these types of relationships. include more than half of  5here are t)o types of pri#ate the )orldOs top 21 industrial net)orksM single-firm retailers and o#er 2%% net)orks and industry-)ide suppliers from 6frica+ net)orks.  6sia+ !urope+ Eorth

p

Single:firm priate in!ustrial  networks are the most common

 6merica+

*outh

a

 6merica+ )ith combined

l

form of pri#ate industrial net)ork. 5hese single-firm net)orks are o)ned by a single large purchasing firm+ such as "alart or :rocter 8 9amble. :articipation is by in#itation only to trusted long-term suppliers of  direct inputs. *ingle-firm net)orks typically e#ol#e out of a firm(s o)n enterprise resource planning system 7!R:;+ and they are an effort to include key suppliers in the firm(s o)n business decision making 7earketer+ Inc.+ 2%%>;.

sales of approimately '&.2

and

trillion. 6gentrics

pro#ides

collaborati#e

design tools planning and

management

negotiations auctions eecution demand

and order  

r  i 6 a t e i n d u s t r  i

n e t ' o r  ; s digital net)o rk desig ned to coordi nate

In!ustry:wi!e priate in!ustrial networks often e#ol#e

the

out of industry associations. 5hese net)orks are usually o)ned by a consortium of the large firms in an industry and ha#e the follo)ing goalsM pro#iding a neutral set of  standards for commercial communication o#er the Internet ha#ing shared and open technology platforms for sol#ing industry problems and in some cases+ pro#iding operating net)orks that allo) members of an entire industry to closely collaborate. 5o some etent+ these industry-)ide net)orks are a response to the success of single-

of

flo) comm unicat ions amon g firms engag ed in busin ess togeth er 

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y2 0 09, Fi f t hEd i t i o n,b yKe nn et hC. L au do nan dCa r o l Gu er c i oT r a v e r . Co p y r i g h t©2 0 0 9b yKe n n et hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s he db yPr e nt i c eHa l l ,a d i v i s i o no fP ea r s o nEd uc at i o n,I n c.

83

C @ 6: 5! R 2

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

aggregation )orld)ide item management )orld)ide logistics and a global catalog in !nglish+ ,rench+ 9erman+ and *panish containing trading relationship data for membersponsored suppliers totaling more than 3%+%%% items 76gentrics C+ 2%%;. ,rom this list of ser#ices and capabilities+ it is clear that industry)ide pri#ate industrial net)orks offer  much more functionality than industry consortia+ although the t)o models appear to be mo#ing closer together  79ebauer and Qagler+ 2%%%;. "e discuss these de#elopments and other  nuances of B2B commerce in Chapter  &2. 2.4

B.!INE!! MO/EL! EMERGING COMMERCE AREA!

"hen )e think about a business+ )e typically think of a business firm that produces a product or good+ and then sells it to a customer. But the "eb has forced us to recognize ne) forms of business+ such as consumer-to-consumer ecommerce+ peer-to-peer ecommerce+ and m-commerce. Ta(le 34 lists some of the business models that can be found in these emerging markets. CON!.MER-TO-CON!.MER >C3C? B.!INE!! MO/EL! Consumer-to-consumer 7C2C; #entures pro#ide a )ay for   consumers to sell to each other+ )ith the help of an online business. 5he first and best eample of this type of  business is eBay+ utilizing a market

IN E-

creator business model. Before eBay+ indi#idual consumers used garage sales+ flea markets+ and thrift shops to both dispose of and ac?uire used merchandise. "ith the introduction of  online auctions+ consumers no longer  had to #enture out of their homes or  offices in order to bid on items of  interest+ and sellers could relin?uish epensi#e retail space that )as no longer needed in order to reach buyers. In return for linking likeminded buyers and sellers+ eBay takes a small commission. 5he more auctions+ the more

TABLE 34

B.!INE!! MO/EL! IN EMERGING E-COMMERCE AREA!

B*IE!**

!S6:!*

D!*CRI:5IAE

R!!E

Consumer-toconsumer

eBay @alf.com

5ransact

:eer-to-peer

=azaa Cloudmark

-commerce

eBay obile :ay:al obile Checkout  6A o#iefone

@elps consumers connect )ith other   consumers to conduct business 5echnology enabling consumers to share files and ser#ices #ia the "eb+ )ithout a common ser#er  !tending business applications using )ireless technology

2  0  0  8  9  3  5  8 1 4

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n n et hC.L a u do na n dCa r o l Gu e r c i o T r a v er .Co py r i g ht©2 00 9b yK en n e t hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s hedbyPr ent i c eHal l ,adi v i s i onof Pe ar s o nEd uc a t i o n,I n c .

*ubscrip ad#ertisi transacti *ales of ser#ices

B u si n es s  o d el s i n ! m er g in g ! - co m me r c e 6r e as

money eBay makes. In fact+ it is one of the fe) "eb companies that has been profitable from day one/and has stayed so for se#eral years. Consumers )ho don(t like auctions but still )ant to find used merchandise can #isit @alf.com 7also o)ned by eBay;+ )hich enables consumers to sell un)anted books+ mo#ies+ music+ and games to other consumers at a fied price. In return for facilitating the transaction+ @alf.com takes a commission on the sale+ ranging from 14J&14+ depending on the sale price+ plus a fraction of the shipping fee it charges. PEER-TO-PEER >P3P? B.!INE!! MO/EL! ike the C2C models+ :2: business models link users+ enabling them to share files and computer resources )ithout a common ser#er. 5he focus in :2: companies is on helping indi#iduals make information a#ailable for anyone(s use by connecting users on the "eb. @istorically+ peer-to-peer soft)are technology has been used to allo) the sharing of  copyrighted music files in #iolation of          4         1         8         5         3         9         8         0         0         2

digital copyright la). 5he challenge for  :2: #entures is to de#elop #iable+ legal business models that )ill enable them to make money. In Chapter &+ )e discussed the difficulties faced by =azaa+ one of the most promi-nent eamples of a :2: business model in action. 5o date+ there are fe) if any eamples of successful :2: e-commerce business models outside of  the music and content file-s)apping sites. @o)e#er+ one company that has successfully used this model outside those t)o arenas is Cloudmark+ )hich offers a :2: anti-spam solution called Cloudmark Desktop. Cloudmark currently protects o#er &% million e-mailboes in &K3 countries.

M-COMMERCE B.!INE!! MO/EL!

 c o m m e r  c e + s h o r  t f  o r  m o b i  l  e : c  o m m e r  c  e

+ t a k e s t r  a d it i o n a l

-commerce models and le#erages emerging ne) )ireless technologies/ described more fully in Chapter 3/ to permit mobile access to the "eb. "ireless "eb technology )ill be used to enable the etension of eisting "eb business models to ser#ice the mobile )ork force and consumer of the future. "ireless net)orks utilize ne)ly a#ailable band)idth and communication protocols to connect mobile users to the Internet. 5hese technologies ha#e already taken off in 6sia and !urope+ and )ill epand greatly in the nited *tates in a fe) years. 5he major  ad#antage of m-commerce is that it pro#ides Internet access to anyone+ anytime+ and any)here+ using )ireless de#ices. 5he key technolo-gies here are cell phone-based 39 7third-generation )ireless;+ "i-,i 7)ireless local area net)orks;+ and Bluetooth 7short-range radio fre?uency "eb de#ices;. 5here are many more cell phone subscribers 7an estimated 3 billion )orld)ide in 2%%; than there are Internet users 75I6+ 2%%;. Cell phone usage is still considerably higher in 6sia and !urope than it is in the nited *tates. @o)e#er+ in the nited *tates+ the introduction of the i:hone in $une 2%%0 and the 39 #ersion in $uly 2%% has brought about a resurgence of  interest in 39 technologies and their  potential role in e-commerce. 5he standards implementing "i-,i )ere first introduced in &<<0+ and since then it has eploded in the nited *tates and else)here. 6nalysts estimate that there are around 221+%%% )ireless hot spots 7locations that enable a "i-,iJenabled de#ice to connect to a nearby )ireless 6E and access the Internet; )orld)ide in 2%% 7$i"ire.com+ 2%%;. ike)ise+ the number of Bluetooth-enabled cell phones is also epanding eponentially. ,or instance+ 0%4of all the cell phones sold the fourth

Co mme r c e :Bu s i n e s s ,T e c h no l o g y ,a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n ne t hC.L a ud o na n dCa r o lGu e r c i oT r a v e r .Co p y r i g h t©2 0 09b y E -

Ke nn et hC.L au do na ndCa r o l Gu er c i oTr a v er .Pu bl i s h edbyPr e nt i c eHa l l , adi v i s i o no fP ea r s o nEd uc at i o n,I n c.

8,

C @ 6: 5! R 2

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

?uarter of 2%%0 in the nited *tates supported Bluetooth. 5)o ne) )ireless tech-nologies that may ha#e an impact are ltra)ideband 7)ireless *B technology;+ )hich )ill be able to transfer large files such as mo#ies o#er short distances+ and Qigbee+ )hich+ like Bluetooth+ )ill connect de#ices to each other but at a longer range and )ith lo)er po)er re?uirements. Despite all of the technological ad#ancements in the last se#eral years+ mobile commerce in the nited *tates has been a disappointment to date. 6ccording to a 2%%0 report+ only 24 of the retail brands in the top &+%%% .*. brands in 2%%0 operated a mobile "eb site+ and in many instances+ they )ere used purely as a marketing and branding #ehicle 7*i)icki+ 2%%0;. @o)e#er+ )ith the introduction of the i:hone and other phones )ith similar  capabilities+ this has begun to change 72i#ure 34+; and a *eptember 2%% Internet Retailer sur#ey found that almost 04 of "eb retailers no) ha#e an m-commerce site 7Brohan+ 2%%;. 5he ser#er-side hard)are and soft)are platform is in place+ and the basic band)idth is ready. 6s )ith all areas of e-com-merce+ the challenge for businesses )ill be finding )ays to use m-commerce to make money )hile ser#ing customer needs. Currently+ demand is highest for digital con-tent such as customized ringtones+ games+ and )allpaper. "ith the introduction of the i:hone+ mobile search applications are likely to become more popular. Consumer  applications are also beginning to appear in high-#olume personal transaction areas+

NOTAVAI LABLEFOR ELECTRONI CVI EWI NG

2  0  0  8  9  3  5  8 1 4

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n n et hC.L a u do na n dCa r o l Gu e r c i o T r a v er .Co py r i g ht©2 00 9b yK en n e t hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s hedbyPr ent i c eHal l ,adi v i s i onof Pe ar s o nEd uc a t i o n,I n c .

B u s i n e s s  o d e l s i n ! m e r  g i n g ! - c o m me r c e 6r e a s

such as 6A(s o#iefone reser#ation system+ eBay(s obile system+ and mobile pay-ment platforms such as :ay:al(s obile Checkout. -commerce business models that hope to rely on push ad#ertising+ as described in Insig#t on Society$ Is Priacy  Possible in a Wireless Worl!; also may face an uphill battle. E-COMMERCE ENABLER!) THE GOL/ R.!H MO/EL Af the nearly 1%%+%%% miners )ho descended

8

on California in the 9old Rush of &><+ less than &4 e#er achie#ed significant )ealth. @o)e#er+ the banking firms+ shipping companies+ hard)are companies+ real estate speculators+ and clothing companies such as e#i *trauss built long-lasting fortunes. ike)ise in e-commerce. Eo discus-sion of ecommerce business models )ould be complete )ithout mention of a group of  companies )hose business model is focused on pro#iding the infrastructure necessary for  e-commerce companies to eist+ gro)+ and prosper. 5hese are the e-commerce enablersM the Internet infrastructure companies. 5hey pro#ide the hard)are+ operating system soft)are+ net)orks and communications technology+ applications soft)are+ "eb designs+ consulting ser#ices+ and other tools that make e-commerce o#er the "eb possible 7see Ta(le 34*;. "hile these firms may not be conducting e-commerce per se 7although in many instances+ e-commerce in its traditional sense is in fact one of their sales channels;+ they as a group ha#e perhaps profited the most from the de#elopment of e-commerce. "e )ill discuss many of these players in the follo)ing chapters.         4         1         8         5         3         9         8         0         0         2

TABLE 34*

E-COMMERCE ENABLER!

I E , R 6* 5 R  C 5  R !

: 6 ! R *

@ard)areM "eb *er#ers *oft)areM Aperating *ystems and *er#er  *oft)are

IB+ @:+ Dell+ *un ,oundation

Eet)orkingM Routers

Cisco+ $D* niphase+ ucent

*ecurityM !ncryption *oft)are

eri*ign+ Check :oint+ !ntrust+ R*6 IB+ icrosoft+ 6riba+ Broadision+ B!6 *ystems

!-commerce *oft)are *ystems 7B2C+ B2B;

icrosoft+ Red@at inu+ *un+ 6pache *oft

*treaming and Rich edia *olutions Customer Relationship anagement *oft)are

Real Eet)orks+ icrosoft+ 6pple+ 6udib Aracle+ *6:+ !.piphany

:ayment *ystems

eri*ign+ :ay:al+ Cybersource

:erformance !nhancement

6kamai+ =ontiki

Databases

Aracle+ icrosoft+ *ybase+ IB

@osting *er#ices

Interland+ IB+ "ebIntellects+ Huest

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y  2009,Fi f t hEd i t i o n,b yKe nn et hC.L au do na ndCa r o l Gu er c i oT r a v e r .Co py r i g ht©2 00 9b yKe n n et hC. L au do nan dCa r o l Gu er c i oT r a v e r .Pu bl i s h edb y Pr e nt i c eHa l l ,ad i v i s i o no fPe ar s onEd uc at i o n,I n c.

8*

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

C @ 6: 5! R 2

IN!IGHT ON !OCIET1 I! PRIAC1 PO!!IBLE IN A
by

ou(re )alking past the local emergency :izza @ut and your cellresponders or la) phone rings. "ho(s callingL enforcement e#en Eo+ it(s not your significant if the phone is not other or a parent or friend.turned on+ and to It(s :izza @ut. 5hey just automatically )anted to let you kno) that track the loca-tion pizzas are on sale/t)o for one+ until K of phones that are :.. today. "ant to find out someone(s turned on. In true address )hen you kno) the home phone emergen-cies+ number and then get a map to thatthese capabilities locationL 9o to 9oogle and enter that are helpful. If you person(s phone number. 5he top listingare in )ill pro#ide you the name and address of emergency

an and

the o)ner of that phone number. Click a use your cell button and you )ill get a map to thephone to call for  house or business. 9oogle calls ithelp+ authorities :honeBook+ but it ne#er asked you tocan find your    join. ou could opt out if you search hard location nearly enough. Ar let(s say you )ant to set up a instantly. )ireless net)ork in your house using "i-

But )hile the ,i 7short for an %2.&&b radio net)ork;. primary goal of  our neighbor )ill possibly be able to pick these )ireless up your signals 7and net)ork traffic; if tracking they are )ithin 3%% feet of your base capabilities is station and FjoinG your net)ork. enhanced public 5hese scenarios are not far-fetched+ safety+ companies but instead represent capabilities of  are already eisting technology. *ome of these de#eloping capabilities ha#e benign or e#en business models humanitarian intentions. ,or instance+ centered on since Acto-ber 2%%&+ all cell phone applications that pro#iders are re?uired to implement )ill allo) them to F!<&&G 7!mergency <&&;+ in )hich your  the cell phone(s embedded 9:* chipseploit 7global posi-tioning system chips; can be technology.

based

s e : r 

>&&G cell phone directory creates cause for e#en greater concern. ,or instance+ in Actober 2%%K+ 5rans-nion+ one of the major credit bureau companies+ ac?uired Hsent+ )hich is de#eloping a ne) )ireless

>&&

ser#ice.

6ccording

to

5ransnion+ Hsent(s tech-nology is ready to go )hene#er cell phone pro#iders decide to enable it. 5he ser#ice )ould re?uires sub-scribers to opt-in in order for  their number to be included in the directory. @o)e#er+ such protection does not apply to a ne) cell phone directory being compiled by Intelius+ )hich is also in the business of selling background checks online

for

a

fee.

Intelius(s

directory+ a#ailable for '&1 per search+ is based on data from marketing companies and public records.

5he specter of more unsolicited+ un)anted phone calls coupled )ith FBig BrotherG-like location tracking has pri#acy ad#ocates raising the alarm. FDe#eloping

)ireless

technology

sho)s many indications of repeating t)o pri#acy disasters of the )ired Internet/spam

and

nonconsensual

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stringent

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munications )hose members included Cingular  Commission to issue "ireless+ :rocter 8 9amble+ and rules to protect eri*ign+ among others. 5he 6 has )ireless subscribers also established a )ireless anti-spam from un)anted commit-tee. 5R*5e+ a not-for-profit mobile ser#ice organization that operates an Internet commercial pri#acy seal program+ has "ireless messages+ and :ri#acy :rinciples and Implementation pro#ides that 9uidelines+ drafted by a "ireless consumers can list  6d#isory Commit-tee that included their cell phone 5R*5e+ 6585 "ireless+ icrosoft+ numbers in the @:+ the 6+ the "ireless ocation Eational Do Eot Call Industry 6ssociation+ and #arious Registry. In 6ugust consumer ad#ocacy groups such as 2%%>+ in accordance the Center for Democracy and )ith the C6E-*:6 5echnology. 5he guidelines co#er such  6ct+ the ,CC topics as notice+ third-party sharing of  proposed regupersonally identifiable information+ and lations+ most of  the use of location-based informa-tion. )ent into nder the guidelines+ )ireless ser#ice )hich pro#iders are encouraged to pro#ide aeffect in Actober 

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full pri#acy statement to the consumer 

addresses are

prior to or during the collection of 

directed at mobile

personally identifiable information+ or 

ser#ices.

upon first use of a ser#ice. 5hey

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C @ 6: 5! R 2

2.5

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

HO< THE INTERNET AN/ THE
Eo) that you ha# e a clea r  gras p of  the #ari ety of  busi ness mod els use d by ecom mer  industr& structue refers to the nature of  ce the players in an industry and their firm relati#e bargaining po)er  s+ you also nee d to industr& structural anal&sis und an effort to understand and describe the erst nature of competition in an industry+ the and nature of substitute products+ the barriers ho) to entry+ and the relati#e strength of the consumers and suppliers Inter  net and

the "eb ha#e changed the business en#ironment in the last decade+ including industry structures+ business strategies+ and industry and firm operations 7business processes and #alue chains;. "e )ill return to these concepts throughout the book as )e eplore the ecommerce phenomenon. In general+ the Internet is an open standards system a#ailable to all players+ and this fact inherently makes it easy for ne) competitors to enter  the marketplace and offer substitute products or channels of deli#ery. 5he Internet tends to intensify competition. Because information becomes a#ailable to e#eryone+ the Internet inherently shifts po)er  to buyers )ho can ?uickly disco#er the lo)est-cost pro#ider  on the "eb. An the other hand+ the

I R I ! 7

" ! -

2  0  0  8  9  3  5  8 1 4

e :Bu s i n es s ,T e c hn ol o gy , a ndSo c i e t y2 00 9,Fi f t h Ed i t i o n,b yKe nn e t hC.L au d onan d Ca r o l Gu er c i oT r a v er .Co py r i g ht© 2009byKennet hC.Laudonand Ca r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr en t i c eHal l ,adi v i s i onofPear s on Ed uc at i o n,I n c.

@ o) t he I nt er ne t a nd t he " e b C h an g e B u s in e s s

TABLE 349 EIGHT .NI.E 2EAT.RE! O2 E-COMMERCE TECHNOLOG1

,!65R!

* !  ! C 5 ! D I  : 6C 5 * A E B  * I E ! * * ! E  I R A E  ! E 5

bi?uity

 6lters industry structure by creating ne) marketing channels and epanding size of o#erall market. Creates ne) efficiencies in industry operations and lo)ers costs of firms( sales operations. !nables ne) differentiation strategies. Changes industry structure by lo)ering barriers to entry+ but greatly epands market at same time. o)ers cost of industry and firm

9lobal reach

operations through production and sales efficiencies. !nables competition

on global scope. ni#ersal standards

Changes industry structure by lo)ering barriers to entry and intensifying

competition )ithin an industry. o)ers costs of industry and firm operations by lo)ering computing and communications costs. !nables broad scope strategies.

Richness

Interacti#ity

:ersonalization customization

Information density

*ocial net)orking technologies

 6lters industry structure by reducing strength of po)erful distribution channels. Changes industry and firm operations cost by reducing reliance on sales forces. !nhances post-sales support strategies.  6lters industry structure by reducing threat of substitutes through enhanced customization. Reduces industry and firm costs by reducing reliance on sales forces. !nables "eb-based differentiation strategies.

 6lters industry structure by reducing threats of substitutes+ raising barriers to entry. Reduces #alue chain costs in industry and firms by lessening reliance on sales forces. !nables personalized marketing strategies. Changes industry structure by )eakening po)erful sales channels+ shifting bargaining po)er to consumers. Reduces industry and firm operations costs by lo)ering costs of obtaining+ processing+ and distributing information about suppliers and consumers. Changes industry structure by shifting programming and editorial decisions to consumers creates substitute entertainment products energizes a large group of ne) suppliers.         4         1         8         5         3         9         8         0         0         2

middlemen such as 5ra#elocity ha#e entered the market to compete )ith traditional tra#el agents.  6fter 5ra#elocity+ !pedia+ Cheap5ickets+ and other tra#el ser#ices demonstrated the po)er of e-

88

marketing for airline tickets+ the actual o)ners of the airline seats/the major   airlines/banded together to form their  o)n Internet outlet for  tickets+ Arbitz+ for direct sales to consumers+ potentially eliminating the middlemen entirely. Clearly+ e-commerce and the Internet create

a n d

new in!ustry !ynamics

a u t o m o b i l e

that can best be described as the gi#e and take of the marketplace+ the changing fortunes of  competitors. et in other   industries+ the Internet and e-commerce ha#e strengthened eisting players. In the chemical

i n d u s t r  i e s

+ e-commerce is being used effecti#ely by manufacturers to strengthen their  traditional distributors. In these industries+ ecommerce technology has not fundamentally altered the competiti#e forces /bargaining po)er  of suppliers+ barriers to entry+ bargaining po)er  of buyers+

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n d So c i e t y2 0 09,Fi f t hEdi t i on ,b yKenn et hC. L a ud onan dCa r o lGu e r c i oT r a v e r .Co p y r i g ht ©2009b yK en n e t hC.L a u do na ndCa r o l Gu er c i oT r a v er .Pu bl i s he db yPr e nt i c eHa l l , ad i v i s i o no fP ear s onEd uc at i o n,I n c.

5::

C @ 6: 5! R 2

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NOTAVAI LABLEFOR ELECTRONI CVI EWI NG

threat of substitutes+ or ri#alry among competitors/)ithin the industry. @ence+ each industry is different and you need to eamine each one carefully to understand the impacts of ecommerce on competition and strategy. Ee) forms of distribution created by ne) market entrants can completely change the

competiti#e forces in an industry. ,or instance+ if a ECo mme r c e :Bu s i n e s s ,T e c h no l o g y ,a n d soft)are firm such Soc as i e t y20 0 9, i f t hEdi t i on, icrosoft disco#ers Fthat b yK en n e t h consumers )ill gladly C.Laudon substitute a '1% or e#en a free ndCa r o l encyclo-pedia on a CD-RA 7a digital information product; Co p y r i g h t© for a '2+1%% set of Britannica Ke n n et hC. encyclopedias 7a physical Laudonand information product;+ thenCthe a r o l Gu er c i o competiti#e forces in the Pu b l i s h e db y encyclopedia industry Pr are ent i c eHal l , radically changed. !#en ifathe di v i s i onof substitute is an inferior  Ed uc at i o n, product+ consumers are able to satisfy their anieties about their children(s education at a much lo)er  cost 79erace+ &<<<;. Inter-firm ri#alry 7competition; is one area of  the business en#ironment )here e-commerce technologies ha#e had an impact on most industries. In general+ the

@ o ) t he I nt er ne t a nd t he "e b C ha n g e B u si n e ss

5:5

        4         1         8         5         3         9         8         0         0         2

Internet has increased price competition in nearly all markets. It has been relati#ely easy for eisting firms to adopt e-commerce technology and attempt to use it to achie#e competiti#e ad#antage #isV-#is ri#als. ,or instance+ the Internet inherently changes the scope of  competition from local and regional to national and global. Because consumers ha#e access to global price information+ the Internet produces pressures on firms to compete by lo)ering prices 7and lo)ering profits;. An the other hand+ the Internet has made it possible for some firms to differentiate their  product or ser#ices from others. 6mazon has patented one-click purchasing for instance+ )hile eBay has created a uni?ue+ easy-to-use interface and a differentiating brand name. R!I+ Inc./a specialty mountain climbing-oriented sporting goods company/ has been able to use its "eb site to maintain its strong niche focus on outdoor gear. 5herefore+ although the Internet has increased emphasis on price competition+ it has also enabled businesses to create ne) strategies for 

differe ntiatio n and brandi ng so that they can retain higher  prices . It is impos sible to deter  mine if ecom merc e techn ologie s ha#e had an o#era ll positi #e or  negat i#e impac t on firm profit ability in gener  al. !ach

industry is uni?ue+ so it is e necessary to perform a separate analysis for each one. Clearly+ in some industries+ in particular+ information product industries such as the music+ ne)spaper+ book+ and soft)are industries+ as )ell as other informationintense industries such as financial ser#ices+ ecommerce has shaken the foundations of the industry. In these industries+ the po)er of consumers has gro)n relati#e to pro#iders+ prices ha#e fallen+ and o#erall profitability has been challenged. In other  industries+ especially manufacturing+ the Internet has not greatly changed relationships )ith buyers+ but has changed relationships )ith suppliers. Increasingly+ manufacturing firms in entire industries ha#e banded together to aggregate purchases+ create industry digital echanges or   marketplaces+ and outsource industrial processes in order to obtain better prices from suppliers. 5hroughout this book+ )e )ill document these changes in industry structure and market dynamics introduced by ecommerce and the Internet. IN/.!TR1 AL.E CHAIN! "hile an industry structural analysis helps us understand the impact of ecommerce technology on the o#erall business

a more detailed industry #alue chain analysis can help identify more precisely just ho) ecommerce may change business operations at the industry le#el 7Benjamin and "igand+ &<<1;. Ane of the basic tools for  understanding the impact of information technology on industry and firm operations is the #alue chain. 5he concept is ?uite simple. 6 6alue c$ain is the set of   acti#ities performed in an industry or in a firm that transforms ra) inputs into final products and ser#ices. !ach of these acti#ities adds economic #alue to the final product hence+ the term alue c#ain as an interconnected set of  #alue-adding acti#ities. 2i#ure 34 illustrates the si generic players in an industry #alue chainM suppliers+ manufacturers+ transporters+ distributors+ retailers+ and customers. By reducing the cost of information+ the Internet offers each of the key players in an industry #alue chain ne) opportunities to maimize their positions by

6alue c$ain the set of acti#itie s perform ed in an industry or in a firm that

transforms ra) inputs into final

ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y  2009,Fi f t hEdi t i on,b y Kennet hC.Laudonand Ca r o lGu er c i oTr a v er . Co p y r i g h t©2 0 0 9b y Kennet hC.Laudonand Ca r o lGu er c i oTr a v er . Pu bl i s he db yPr e nt i c eHa l l , adi v i s i o no fP ea r s o n Ed uc at i o n,I n c.

products and ser#ices

5:3

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C @ 6: 5! R 2

2IG.RE 34

E-COMMERCE AN/ IN/.!TR1 AL.E CHAIN!

!#ery industry can be characterized by a set of #alue-adding acti#ities performed by a #ariety of actors. !-commerce potentially affects the capabilities of each player as )ell as the o#erall operational efficiency of the industry. s

"ir  m 6al ue c$a in the set of  acti#i ties a firm enga ges in to creat e final prod ucts from ra) input

l o

to strengthen their ser#ice to customers. Customers in turn can use the "eb to search for the best ?uality+ fastest deli#ery+ and lo)est prices+ thereby lo)ering their transaction costs and reducing prices they pay for final goods. ,inally+ the operational efficiency of the entire industry can increase+ lo)ering prices and adding #alue to consumers+ and helping the industry to compete )ith alternati#e industries. Dell Inc.+ for instance+ employs a number of these stratagems+ most notably a sales model for personal computers that bypasses traditional retail distribution channels by selling directly to consumers o#er the "eb. Dell also has de#eloped a highly efficient supply chain management system to reduce its costs+ and an e?ually efficient customer relationship management system to support customers and add to the #alue of  its products.

2IRM AL.E CHAIN! 5he concept of #alue chain can be used to analyze a single firm(s operational efficiency as )ell. 5he ?uestion here isM @o) does e-commerce technology potentially affect the #alue chains of firms )ithin an industryL 6 "irm 6alue c$ain is the set of acti#ities a firm engages in to create final products from ra) inputs. !ach step in the process of production adds #alue to the final product. In addition+ firms de#elop support acti#ities that coordinate the production process and

e :Bu s i n es s ,T e c hn ol o gy , a ndSo c i e t y2 00 9,Fi f t h Ed i t i o n,b yKe nn e t hC.L au d onan d Ca r o l Gu er c i oT r a v er .Co py r i g ht© 2009byKennet hC.Laudonand Ca r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr en t i c eHal l ,adi v i s i onofPear s on Ed uc at i o n,I n c.

@ o ) t he I nt er ne t a nd t he "e b C ha n g e B u si n e ss

5:+

NOTAVAI LABLEFOR ELECTRONI CVI EWI NG         4         1         8         5         3         9         8         0         0         2

contribute operational

to

o#erall efficiency. 2i#ure 34* illustrates the key steps and support acti#ities in a firm(s #alue chain. 5he Internet offers firms many opportunities to increase their   operational efficiency and differentiate their products. ,or instance+ firms can use the Internet(s communications efficiency to outsource some primary and secondary acti#ities to specialized+ more efficient pro#iders )ithout such outsourcing being #isible to the consumer. In addition+ firms can use the Internet to more precisely coordinate the steps in the #alue chains and reduce

their  costs . ,inall y+ firms can use the Intern et to pro#i de users )ith more differ  entiat ed and high#alue produ cts. ,or  insta nce+  6maz on uses the Intern et to pro#i

de consumers )ith a much c larger in#entory of books to choose from+ at a lo)er  cost+ than traditional book stores. It also pro#ides many ser#ices/such as instantly a#ailable professional and consumer  re#ie)s+ and information on buying patterns of other  consumers/that traditional bookstores cannot. 2IRM AL.E
ECo mme r c e :Bu s i n e s s, T e ch no l o gy , a ndSo c i e t y  2009,Fi f t hEdi t i on,b y Kennet hC.Laudonand Ca r o lGu er c i oTr a v er . Co p y r i g h t©2 0 0 9b y Kennet hC.Laudonand Ca r o lGu er c i oTr a v er . Pu bl i s he db yPr e nt i c eHa l l , adi v i s i o no fP ea r s o n Ed uc at i o n,I n c.

6alue 'e( net)o rked transbusine ss syste m that coordi nates the #alue chains of se#er  al firms

5:,

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2IG.RE 349

! - c om m er c e B u s i ne s s  o d el s a nd C on ce pt s

INTERNET-ENABLE/

AL.E
Internet technology enables firms to create an enhanced #alue )eb in cooperation )ith their strategic alliance and partner firms+ c ustomers+ and direct and indirect suppliers. of

p

produ cing and distrib uting goods

(usiness strate#& a set of plans for achie#ing superior long-term returns on the capital in#ested in a business firm

pro"it the difference bet)een the price a firm is

 6 #alue )eb coordinates a firm(s suppliers )ith its o)n production needs using an Internetbased supply chain management system. "e discuss these B2B systems in Chapter &2. ,irms also use the Internet to de#elop close relationships )ith their logistics

part+ the #alue deli#ered by its #alue )eb partners. 5his is difficult for other firms to imitate in the short run. B.!INE!! !TRATEG1  6 (usiness strate#& is a set of  plans for achie#ing superior  long-term returns on the capital in#ested in a business firm. 6 business strategy is therefore a plan for making profits in a competiti#e en#ironment o#er  the long term. Pro"it is simply

e :Bu s i n es s ,T e c hn ol o gy , a ndSo c i e t y2 00 9,Fi f t h Ed i t i o n,b yKe nn e t hC.L au d onan d Ca r o l Gu er c i oT r a v er .Co py r i g ht© 2009byKennet hC.Laudonand Ca r o l Gu er c i oT r a v er .Pu bl i s h edb y Pr en t i c eHal l ,adi v i s i onofPear s on Ed uc at i o n,I n c.

@ o ) t he I nt er ne t a nd t he "e b C ha n g e B u si n e ss

the difference bet)een the price a firm is able to charge for its products and the cost of producing and distributing goods. :rofit represents economic #alue. !conomic #alue is created anytime customers are )illing to pay more for a product than it costs to produce. "hy )ould anyone pay more for  a product than it costs to produceL 5here are multiple ans)ers. 5he product may be uni?ue 7there are no other suppliers;+ it may be the least costly product of its type a#ailable+ consumers may be able to purchase the product any)here in the )orld+ or it may satisfy some uni?ue needs that other  products do not. !ach of these sources of economic #alue defines a firm(s strategy for  positioning its products in the marketplace. 5here are four generic strategies for   achie#ing a profitable businessM differentiation+ cost+

5:

scope+ and focus. "e describe each of these belo). 5he specific strategies that a firm follo)s )ill depend on the product+ the industry+ and the marketplace )here competition is encountered.  6lthough the Internet is a uni?ue marketplace+ the same principles of strategy and business apply. 6s )e )ill see throughout the book+ successful ecommerce strategies in#ol#e using the Internet to le#erage and strengthen eisting business 7rather than destroy your business;+ and to use the Internet to pro#ide products and ser#ices your   competitors cannot copy 7in the short term any)ay; and that means de#eloping uni?ue products+ proprietary content+ distinguishing processes 7like  6mazon(s one-click shopping;+ and personalized or   customized ser#ices and products 7:orter+ 2%%&;. et(s eamine these ideas more closely. /i""erentiation

refers to all the )ays producers can make their products uni?ue and distinguish them

f  r  o m t h o s e o f  c o m p e ti t o r  s . 5 h e o p p o s it e o f  d if  f  e r  e n ti -

ation

is commoditi=ation/ a situation )here there are no differences among products or ser#ices+ and the only basis of  choosing a product is price. 6s economists tell us+ )hen price alone becomes the basis of   competition and there are many suppliers and many customers+ e#entually the price of the good falls to the cost to produce it 7marginal re#enues from the nth unit e?ual marginal costs;. 6nd then profits are zeroU 5his is an unacceptable situation for any business person. 5he solution is to differentiate your  product and to create a monopolylike situation )here you are the only supplier. 5here are many )ays businesses differentiate their  products. 6 business may start )ith a core generic product+ but then create epectations among users about the FeperienceG of   consuming the product/FEothing refreshes like a CokeUG or FEothing e?uals the eperience of dri#ing a B".G Businesses

        4         1         8         5         3         9         8         0         0         2

may also augment products by adding features to make them different from those of  competitors. 6nd businesses can differentiate their  products further by enhancing the products( abilities to sol#e related consumer problems. ,or instance+ ta programs such as 5urbo5a can import data from spreadsheet programs+ as )ell as be used to electronically file ta returns. 5hese capabilities are enhancements to the product that sol#e a customer(s problems. 5he purpose of   marketing is to create these differentiation features and to make the consumer a)are of  the uni?ue ?ualities of  products+ creating in the process a FbrandG that stands for these features. "e discuss marketing and branding in Chapter K.

d i"  "  e r  e n ti a ti o n

r  e f  e r  s t o a ll t h e ) a y s

ucers can make their products uni?ue and different to commoditi=ation distinguish them from those of  a situation )here there are no competitors differences among products or ser#ices+

is price

and the only basis of choosing products T e c hn ol o gy , a ndSo c i e t y  2009,Fi f t hEdi t i on,by hC.LaudonandCar ol ECo mme r c e :Bu s i n e s s, Kennet Gu er c i oT r a v er .Co py r i g ht©

200 C.L a u do na n dCa r o l Gu e r c i o 9byT r a v e r . Pu bl i s he db yPr e nt i c e Ken Ha l l ,adi v i s i o no fP ear s on n et hEd uc at i o n,I n c.

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In their totality+ the differentiation features of a product constitute the customer #alue proposition )e described in earlier sections of this chapter. 5he Internet and the "eb offer some uni?ue )ays to differentiate products. 5he ability of  the "eb to personalize the shopping eperience and to customize the product or ser#ice to the particular  demands of each consumer are perhaps the most significant )ays in )hich the "eb can be used to differentiate products. !-commerce businesses can also differentiate products by le#eraging the ubi?uitous nature of the "eb 7by making it possible to purchase the product from home+ )ork+ or on the road; the global reach of the "eb 7by making it possible to purchase the product any)here in the )orld; richness and interacti#ity 7by creating "eb-based eperiences for  people )ho use the product+ such as uni?ue interacti#e content+ #ideos+ stories about users+ and re#ie)s by users; and information density 7by storing and processing information for consumers of the product+ such as )arranty information on all products purchased through a site or  income ta information online;.  6dopting a strategy of cost  competition  means a business has disco#ered some uni?ue set of  business processes or resources that other firms cannot obtain in the marketplace. Business processes are the atomic units of the #alue chain. ,or instance+ the set of #aluecreating acti#ities called Inbound ogistics in ,igure 2.K is in reality

composed of many different collections of acti#ities performed by people on the loading docks and in the )arehouses. 5hese different collections of acti#ities are called business processes/the set of  steps or procedures re?uired to perform the #arious elements of the #alue chain. "hen a firm disco#ers a ne)+ more efficient set of business processes+ it can obtain a cost ad#antage o#er competitors. 5hen it can attract customers by charging a lo)er price+ )hile still making a handsome profit. !#entually+ its competitors go out of business as the market decisi#ely tilts to)ard the lo)est-cost pro#ider. Ar+ )hen a business disco#ers a uni?ue resource+ or lo)er-cost supplier+ it can also compete effecti#ely on cost. ,or instance+ s)itching production to lo)-)age-cost areas of the )orld is one )ay to lo)er costs. Competing on cost can be a short-li#ed affair and #ery tricky. Competitors can also disco#er the same or different efficiencies in production. 6nd competitors can also mo#e production to lo)-cost areas of the )orld. 6lso+ competitors may decide to lose money for a period as they compete on cost. 5he Internet offers some ne) )ays to compete on cost+ at least in the short term. ,irms can le#erage the Internet(s ubi?uity by lo)ering the costs of order entry 7the customer fills out all the forms+ so there is no order entry department; le#erage global reach and uni#ersal standards by ha#ing a single order  entry system )orld)ide and le#erage richness+ interacti#ity+ and personalization by creating customer  profiles online and treating each indi#idual consumer differently/ )ithout the use of an epensi#e sales force that performed these functions in the past. ,inally+ firms

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can le#erage the information intensity of the "eb by pro#iding consumers )ith detailed information on products+ )ithout maintaining either epensi#e catalogs or a sales force.

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n n et hC.L a u do na n dCa r o l Gu e r c i o T r a v er .Co py r i g ht©2 00 9b yK en n e t hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s hedbyPr ent i c eHal l ,adi v i s i onof Pe ar s o nEd uc a t i o n,I n c .

@ o) t he I nt er ne t a nd t he " e b C h a ng e B u si n es s

"hile the Internet offers po)erful capabilities for intensifying cost competi-tion+ making cost competition appear to be a #iable strategy+ the danger is that competitors ha#e access to the same technology. 5he factor market s /)here producers buy their  supplies/are open to all. 6ssuming they ha#e the skills and organizational )ill to use the technology+ competitors can buy many of the same cost-reducing techni?ues in the marketplace. !#en a skilled labor force can be purchased+ ultimately. @o)e#er+ selfkno)ledge+ proprietary tacit kno)ledge 7kno)ledge that is not published or codified;+ and a loyal+ skilled )orkforce are in the short term difficult to purchase in factor  markets. 5herefore+ cost competition remains a #iable strategy. 5)o other generic business strategies are scope and focus. 6 scope strategy  is a strategy to compete in all markets around the globe+ rather than merely in local+ regional+ or national markets. 5he Internet(s global reach+ uni#ersal standards+ and ubi?uity can certainly be le#eraged to assist businesses in

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becoming global competitors. ahoo+ for instance+ along )ith all of the other  top 2% e-commerce sites+ has readily attained a global presence using the Internet. 6 focus strategy   is a strategy to compete )ithin a narro) market segment or product segment. 5his is a specialization strategy )ith the goal of  becoming the premier pro#ider in a narro) market. ,or instance+ ..Bean uses the "eb to continue its historic focus on outdoor sports apparel and ".".9rainger/the "eb(s most fre?uently #isited B2B site/focuses on a narro) market segment called RAM maintenance+ repair+ and operations of commercial buildings. 5he Internet offers some ob#ious capa-bilities that enable a focus strategy. ,irms can le#erage the "eb(s rich interacti#e features to create highly focused messages to different market segments the information intensity of the "eb makes it possible to focus e-mail and other mar-keting campaigns on small market segments personalization/and related customization/means the same product can be customized and personalized to fulfill the #ery focused needs of  specific market segments and consumers.

Industry structure+ industry and firm #alue chains+ #alue )ebs+ and business strategy are central business concepts used throughout this book to analyze the #iability of  and prospects for e-commerce sites. In particular+ the signature case studies found at the end of each chapter are follo)ed )ith ?uestions that may ask you to identify the competiti#e forces in the case+ or  analyze ho) the case illustrates changes in industry structure+ industry and firm #alue chains+ and business strategy. 1:commerce in  &ction  cases 7found in Chapters
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ECo mme r c e :Bu s i n e s s ,T e c h no l o g y ,a ndSo c i e t y2 0 09,Fi f t hEdi t i on,b y Ke nn e t hC.L a ud ona ndCa r o lGu e r c i oT r a v e r .Co p y r i g ht©2 0 09b y Ke nn et hC.L au do nan dCa r o l Gu er c i oT r a v e r .Pu bl i s h edb yPr e nt i c e Ha l l ,ad i v i s i o no fPe ar s onEd uc at i o n,I n c.

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C A! E ! T . /1

Priceline4com and the *earch for a Business odel that "orks

:

riceline is one of companies. the "eb(s most )ell-kno)n Its FEame our A)n :riceG re#erse-auction pricing system is a uni?ue business model that uses the information sharing and communications po)er of the Internet to create a ne) )ay of pricing products and ser#ices. 6t :riceline+ consumers can enter a bid for tra#el+ hotels+ rental cars+ and e#en home financing. :riceline ?ueries its #endors 7airline+ hotel+ and financial ser#ice firms; to see if anyone )ill accept the bid. :riceline offers a compelling #alue proposition to customers+ allo)ing them to sa#e money by trading off fleibility about brands+ product features+ andor  sellers in return for lo)er prices. endors also can gain additional re#enue by selling products they

might not other)ise be able to sell by accepting belo)-retail price offers+ )ithout disrupting their  eisting distribution channels or  retail pricing structure. :riceline is an eample of using the "eb to achie#e efficient price discriminationM charging some consumers much more than others for the same product. In 2%%0+ :riceline sold about 2.< million airline tickets+ 20.0 million hotel room nights+ and .K million rental car days.

NOTAVAI LABLEFOR ELECTRONI CVI EWI NG

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ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n n et hC.L a u do na n dCa r o l Gu e r c i o T r a v er .Co py r i g ht©2 00 9b yK en n e t hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s hedbyPr ent i c eHal l ,adi v i s i onof Pe ar s o nEd uc a t i o n,I n c .

C a s e * t ud y

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5he original #ision of :riceline(s founder $ay "alker )as called Fdemand collection.G "alker poured millions into the concept of a one-stop shopping center for goods and ser#ices from trucks+ to toothpaste+ to #acation tra#el. But for much of its early history+ :riceline )as not profitable. In &<<<+ it lost o#er '& billion. It pared losses to '&1 million by 2%%&+ but then+ as tra#el declined after  the *eptember &&+ 2%%&+ "orld 5rade Center tragedy+ regressed in 2%%2+ posting a '23 million dollar loss. =ey eecuti#es resigned. @eadlines such as F:riceline on the RopesG and FCurtain Call for :riceline.comG predominated. @o)e#er+ in 2%%3+ :riceline recorded its first e#er annual profit+ recording '&%.> million in net income. 5he good ne)s has continued since. In 2%%>+ :riceline recorded operating income 7income before ta adjustments; of '3% million in 2%%1+ '31 million in 2%%K+ 'K& million and in 2%%0+ &11.1 million. 7During the period bet)een $une 2%%3 and December 2%%K+ :riceline(s stock held relati#ely steady in the mid'2%J'3% range+ but has since steadily increased+ reaching a high of '&>> in ay 2%% before dropping back do)n into the '<1-'&%% range in the months fol-lo)ing;. In 2%%+ :riceline continued to eceed analyst epectations+ )ith operating income for the second ?uarter  of 2%% totaling '1>.& million compared to '3>.K mil-lion for the same period in 2%%0. *uddenly+ :riceline )as the darling of "all *treet )ith its stock price doubling in the course of a year+ and far  outstripping ri#als like Arbitz and 5ra#elocity+ both of )hom )ere ha#e earnings declines. :ricelineOs rise occurred )hen )orld)ide tra#el )as declining due to rising oil prices. @o) has :riceline engineered this seeming turnaroundL @as it finally

f  o u n d a b u s i n e s s m o d e l t h a t ) o r  k s L " h a t ) e n t ) r  o n g ) i t

its original business+ )hich initially seemed so promisingL :riceline commenced operations on  6pril K+ &<<+ )ith the sale of airline tickets. 5o purchase a Eame our A)n :rice ticket+ a customer logs onto :riceline(s "eb site+ specifies the origin and destination of the trip+ the dates he or she )ishes to depart+ the price the customer is )illing to pay+ and a #alid credit card to guarantee the offer. 5he customer must agree to fly on any major  airline+ lea#e at any time of day bet)een K 6.. and &% :..+ accept at least one stop or connection+ recei#e no fre?uent flier miles or upgrades+ and accept tickets that cannot be refunded or  changed. pon recei#ing the offer+ :riceline checks the a#ailable fares+ rules+ and in#entory pro#ided by its participating airlines and determines )hether it )ill fulfill the order at the re?uested price. If so+ it notifies the customer )ithin an hour that his or her  offer has been accepted. An the consumer side+ a central premise of  :riceline(s Eame our A)n :rice business model is that in many product and ser#ice categories+ there are a significant number of consumers for  )hom brands+ product features+ and sellers are interchangeable+ particularly if agreeing to a substitution among brands or sellers )ill result in sa#ing money. An the #endor side+ the :riceline Eame our A)n :rice business model is predicated on the assumption that sellers almost in#ariably ha#e ecess in#entory or capacity that they )ould sell at lo)er prices+ if they could do so )ithout either lo)ering their prices to retail customers or ad#ertising that lo)er  prices are a#ailable. :riceline belie#ed that its business model )as ideally suited to industries characterized by epiring or rapidly aging in#entory 7for  eample+ airline seats not

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e

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o fP ea r s o nEd uc a t i o n,I n c .

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sold by the time a flight takes off or hotel rooms not rented;+ although it did not think that it )ould be limited to such industries. :riceline etended its system to hotel reser#ations in Actober &<<+ and in $anuary &<<<+ introduced home financing ser#ices. It )ent public in arch &<<<+ and later that year+ it added rental cars and e#en ne) cars to the mi. 5o promote its products and the :riceline brand+ :riceline embarked on an etensi#e 7and epensi#e; ad#ertising campaign+ hiring "illiam *hatner to become the #oice of  :riceline+ and it ?uickly became one of  the most recognizable brands on the "eb.  6t the beginning of 2%%%+ :riceline licensed the Eame our A)n :rice business model to se#eral affiliates+ including :riceline "ebhouse Club+ )hich attempted to etend the model to groceries and gasoline+ and :erfect ardsale+ )hich used the model to sell used goods online+ and added long distance calling and tra#el insur-ance. :riceline also had ambitious plans to epand internationally+ and in 2%%%+ licensed its business model to companies planning to set up similar operations in  6sia and 6ustralia. @o)e#er+ by fall 2%%%+ the picture no longer looked so rosy. In Actober 2%%%+ after only &% months of operation+ :riceline(s affiliate :riceline "ebhouse Club+ unable to raise additional financing+ shut do)n its business+ after running through '3K3 million. 5he financial climate at the time+ )ith its rene)ed emphasis on profitability+ made it impossible for $ay "alker+ :riceline(s founder+ to raise the

additional hundreds of millions that )ould be re?uired before "ebhouse might become profitable. "alker did not see the closure as a failure of the :riceline business model+ ho)e#er. Instead+ he characterized it as the result of the Ffickle sentimentsG of in#estors. any analysts did not accept "alker(s characterization. Instead+ they pointed to other factors. ,irst+ many of the major manufacturers of  food and dried goods chose not to participate in :riceline "ebhouse. *o+ to generate consumer interest+ :riceline "ebhouse subsidized discounts on most products itself. 6lthough some major  manufacturers+ such as =ellogg(s and @ershey(s+ did e#entually sign up+ many+ such as =raft+ :rocter 8 9amble+ and e#er Brothers+ did not. 5he second miscalculation )as that bidding on groceries and gasoline did not eactly pro#ide a Fhassle-freeG )ay to shop. Customers )ere re?uired to bid on and pay for groceries online+ then use a special identification card to pick them up at a participating supermarket. If the particular items purchased )ere not a#ailable at the store+ the customer )ould either ha#e to go to another store or  return at another time. 5o many+ the demise of :riceline "ebhouse highlighted potential cracks in the :riceline business model and raised strong concerns about its ultimate etensibility. :riceline(s founder $ay "alker resigned in December  2%%%. Ee) management sharply curtailed :riceline(s epansion and laid off o#er &+%%% employees. :riceline Chairman Richard Braddock said+ F:riceline )ill enter-tain selecti#e epansion... )ith stringent financial controls. "e(re going to make money on this and mo#e for)ard.G In 2%%2+ :riceline focused on its core business of  tra#el reser#ations+ shedding its auto sales and long distance telephone units. Its only non-tra#el business today is its ><4 interest in :riceline ortgage. 6nd in 2%%3J2%%>+ it t)eaked its business model once again+ adding ne) discount FretailG

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n ne t hC.L a ud o na n dCa r o lGu er c i oT r a v e r . Co p y r i g h t©2 0 09b yKennet hC.Laudonand Ca r o lGu er c i oT r a v e r .Pu bl i s he db yPr e nt i c eHa l l , adi v i s i o no fP ear s onEd uc at i o n,I n c.

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Case *tudy

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as a single Eame our A)n :rice ticket;+ and to a certain etent FcannibalizeG its airline ticketEame our A)n :rice tickets+ :riceline and rentalhas made up at least some of the car ser#icesdifference in increased #olume. 5o further  to support this strategy+ :riceline ac?uired a complement majority interest in 5ra#el"eb+ a its hallmarkconsortium of fi#e large hotel chains that Eame our pro#ides :riceline )ith access to discount A)n :ricehotel rooms+ purchased 6cti#e @otels and offerings+ inBookings B..+ a !uropean hotel order toreser#ation ser#ice+ and in 2%%1 etended compete its retail strategy to the hotel market. In more 2%%K and 2%%0+ :riceline focused on effecti#ely adding to its full-ser#ice tra#el offerings in )ith firmsthe nited *tates+ and recognizing that such asthe gro)th of the domestic online market !pedia+ for tra#el ser#ices had slo)ed+ on building 5ra#elocity+ its brand in !urope and 6sia. Its @ot)ire+ andinternational business represented Arbitz for approimately 1K4 of its gross bookings the businessduring 2%%0+ and )as a substantial of thecontrib-utor to its operating income during consumer  that period. :rior to the fourth ?uarter of  )ho prefers2%%>+ substantially all of its re#enues to book a)ere generated in the nited *tates. specific :riceline epects that the international airline orsegment   of its business )ill represent a rental car.gro)ing per-centage of its business in the  6lthough years to come. In 2%% :riceline these eliminated the '1 to '&& booking fee ser#ices are)hich nearly all tra#el sites charge for  not asairline bookings. Ather sites ha#e not lucrati#e asstopped charging this fee. 6s a result+ the Eame:riceline has become the undisputed lo) our A)ncost air reser#ation site. :rice model  6s noted abo#e+ these strategic 7it takes &.1 mo#es by :riceline ha#e succeeded in to 2.1 retailgenerating annual profits since 2%%>. plane tickets@o)e#er+ although :riceline is currently to bring inFin the black+G a rosy future is by no the samemeans assured. :riceline faces industrygross profit)ide shrinkage in all forms of tra#el

caused by the fear of   terrorism+ )ar+ high fuel prices and economic recession . In addition+ :riceline faces etraordi nary competiti on+ not  just from other  online middlem en such as !pedia+ 5ra#eloci ty+ @otels.co m+ @ot)ire+ and Cheap5ic kets+ but also from the direct discount sales by airlines. :ricelineO s competit ors could easily

drop their  airline booking fees. Its business model today 7discount tra#el ser#ices; is a mere shado) compared to $ay "alker(s epansi#e #ision. *o e#en though right no) it looks as if  :riceline )ill!O.RCE!) :riceline.com Incorpo-rated ,orm &%-H Huarterly Report for sur#i#e+ the?uarterly period ended $une 3%+ 2%%+ filed )ith the *ecurities and !change Commission on 6ugust + 2%% P@ot 9ro)th Compa?uestion niesM:riceline Is Really 9oing :laces+P by 6aron :ressman+ remainsM for Business"eek Anline+ ay 2<+ 2%% P:riceline Autshines Its Ri#als+P by Rick unarriz+ 5he otley ,ool+ ay &2+ 2%% :riceline.com ho) longIncorporated Report on ,orm &%-= for the fiscal year ended December and on )hat3&+ 2%%0+ filed )ith t he *ecurities and !change Commission on arch &+ 2%% F:riceline.com Reports ,inancial Results for >th Huarter and termsL ,ull-ear 2%%0G+ :riceline.com :ress Release+ ,ebruary &>+ 2%% FBeam

ents of  :riceli ne(s busin ess model L

Cas e !tu d& u esti ons 2.

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Do you think :riceli ne )ill ultima tely succe ed or  failL "hyL

e p+ :ricelineG by Rick unar-riz+ 5he otley ,ool+  6ugust + 2%%0.

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ECo mme r c e :Bu s i n e s s, T e c hn ol o gy , a ndSo c i e t y2 00 9, Fi f t hEd i t i o n,b yKe nn et hC. L au do nan dCa r o l Gu er c i oT r a v er . Co p y r i g h t©2 0 09b yKe n n et hC. L au do nan dCa r o l Gu er c i oT r a v er . Pu bl i s he db yPr e nt i c eHa l l ,a d i v i s i o no fP ea r s o nEd uc at i o n,I n c.

4.

2.7

,ollo) up on de#elopments at :riceline since *eptember 2%% )hen this case study )as prepared. @as its business model andor strategy changed at all+ and if so+ ho)L "ho are its strongest competitorsL Is it profitable or operating at a lossL

REIE<

0 E 1 C O N C EP T !

Identify the key components of ecommerce business models.  6 successful business model effecti#ely addresses eight key elementsM 1• 5alue proposition/ho) a company(s product or ser#ice fulfills the needs of customers. 5ypical e-commerce #alue propositions include personalization+ customization+ con#enience+ and reduction of product search and price deli#ery costs. 2• Reenue mo!el /ho) the company plans to make money from its operations. ajor ecommerce re#enue models include the ad#ertising model+ subscription model+ transaction fee model+ sales model+ and affiliate model. 3• Market opportunity /the re#enue potential )ithin a company(s intended marketspace. 4• Competitie enironment /the direct and indirect competitors doing business in the same marketspace+ including ho)

5•

6•

7•

8•

many there are and ho) profitable they are. Competitie a!antage/ the factors that differentiate the business from its competition+ enabling it to pro#ide a superior product at a lo)er cost. Market strategy / the plan a company de#elops that outlines ho) it )ill enter a market and attract customers. 8rganizational !eelopment / the process of defining all the functions )ithin a business and the skills necessary to perform each job+ as )ell as the process of recruiting and hiring strong employees. Management team/the group of indi#iduals retained to guide the company(s gro)th and epansion.

Describe the major B2C business models. 5here are a number of different business models being used in the B2C e-commerce arena. 5he major models include the follo)ingM 1• Portal /offers po)erful search tools plus an integrated package of content and ser#ices typically utilizes a combined subscriptionad#ertising re#enue transaction fee model may be general or specialized 7#ortal;. 2• 1:tailer /online #ersion of traditional retailer includes #irtual merchants 7online retail store only;+ bricks-and-clicks e-tailers 7online distribution channel for a company that also has physical stores;+ catalog merchants 7online #ersion of direct mail catalog;+ and manufacturers selling directly o#er  the "eb. 2  0  0  8  9  3  5  8 1 4

ECo mme r c e :Bu s i n es s ,T e c h no l o gy , a n dSo c i e t y2 0 09,Fi f t hEdi t i on,by Ke n n et hC.L a u do na n dCa r o l Gu e r c i o T r a v er .Co py r i g ht©2 00 9b yK en n e t hC. L au do nan dCa r o l Gu er c i oT r a v e r . Pu bl i s hedbyPr ent i c eHal l ,adi v i s i onof Pe ar s o nEd uc a t i o n,I n c .

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1• C 

o n t  e n t   p r  o   i  !  e r 

/ i n f  o r  m a ti o n a n d e n t e r  t a i n m e n t c o m p a n i

2•

3•

4• 5•

s that pro#ide digital content o#er the "eb typically utilizes an ad#ertising+ subscription+ or affiliate referral fee re#enue model. Transaction broker/   processes online sales transactions typically utilizes a transaction fee re#enue model. Market creator /uses Internet technology to create markets that bring buyers and sellers together typically utilizes a transaction fee re#enue model. Serice proi!er /offers ser#ices online. Community proi!er /pro#ides an online community of likeminded indi#iduals for net)orking and information sharing re#enue is generated by ad#ertising+ referral fees+ and subscriptions.

Describe the major B2B business models. 5he major business models used to date in the B2B arena includeM 1• 1:!istributor / supplies products directly to indi#idual businesses. firms 2• 1:procurement /single create digital markets for  thousands of sellers and buyers. 3• 1"c#ange/independently o)ned digital marketplace for  direct inputs+ usually for a #ertical industry group. consortium/industry-o)ned #ertical digital 4• In!ustry market. 5• Priate in!ustrial network / industry-o)ned pri#ate industrial net)ork that coordinates supply chains )ith a limited set of   partners.

Recognize business models in other emerging areas of e-commerce.  6 #ariety of business models can be found in the consumer-to-consumer ecommerce+ peer-to-peer ecommerce+ and mcommerce areasM

1• C 

4  C  b u s i  n e s s m o !  e l  s

/ c o n n e c t c o n s u m e r  s ) it h o t h e r  c o n s u m e

rs. 5he most successful has been the market creator  business model used by eBay. 2• P4P business mo!els/enable consumers to share files and ser#ices #ia the "eb )ithout common ser#ers. 6 challenge has been finding a re#enue model that )orks. 3• M:commerce business mo!els/ take traditional e-commerce models and le#erage emerging )ireless technologies to permit mobile access to the "eb. enablers/ 4• 1:commerce focus on pro#iding the infrastructure necessary for  e-commerce companies to eist+ gro)+ and prosper.

nderstand key business concepts and strategies applicable to e-commerce. 5he Internet and the "eb ha#e had a major impact on the business en#ironment in the last decade+ and ha#e affectedM 1• In!ustry structure /the nature of players in an industry and their relati#e bargaining po)er by changing the basis of competition among ri#als+ the barriers to entry+ the threat of ne) substitute products+ the strength of suppliers+ and the bargaining po)er of buyers. 2• In!ustry alue c#ains /the set of acti#ities performed in an industry by suppliers+ manufacturers+ transporters+ distributors+ and retailers that transforms ra) inputs into final products and ser#ices by reducing the cost of information and other transaction costs.

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55,

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1• 'irm alue c#ains/the

set of  acti#ities performed )ithin an indi#idual firm to create final products from ra) inputs by increasing operational efficiency. 2• Business strategy /a set of plans for achie#ing superior long-term returns on the capital in#ested in a firm by offering uni?ue )ays to differentiate products+ obtain cost ad#antages+ compete globally+ or compete in a narro) market or product segment.

.E!TION ! 1. 2. 3. 4. 5.

6.

7.

8.

"hat is a business modelL @o) does it differ from a business planL "hat are the eight key components of  an effecti#e business modelL "hat are 6mazon(s primary customer  #alue propositionsL Describe the fi#e primary re#enue models used by e-commerce firms. "hy is targeting a market niche generally smarter for a community pro#ider than targeting a large market segmentL Besides music+ )hat other forms of information could be shared through peer-to-peer sitesL 6re there legitimate commercial uses for :2: commerceL "ould you say that  6mazon and eBay are direct or indirect competitorsL 7ou may ha#e to #isit the "eb sites to ans)er.; "hat are some of the

9.

10.

11. 12.

13.

14.

15.

16.

17. 18.

19.

specific )ays that a company can obtain a competiti#e ad#antageL Besides ad#ertising and product sampling+ )hat are some other market strategies a company might pursueL "hat elements of   ,reshDirect(s business model may be faultyL Does this business scale up to a regional or   national sizeL "hy is it difficult to categorize ecommerce business modelsL Besides the eamples gi#en in the chapter+ )hat are some other eamples of  #ertical and horizontal portals in eistence todayL "hat are the major differences bet)een #irtual storefronts+ such as Drugstore.com+ and bricks-and-clicks operations+ such as "almart.comL "hat are the ad#antages and disad#antages of eachL Besides ne)s and articles+ )hat other forms of information or content do content pro#iders offerL "hat is a re#erse auctionL "hat company is an eample of this type of  businessL "hat are the key success factors for echangesL @o) are they different from portalsL "hat is an application ser#ice pro#iderL "hat are some business models seen in the C2C and :2: e-commerce areasL @o) ha#e the uni?ue features of e-commerce technology changed industry structure in the tra#el businessL

20.

21.

"ho are the major  players in an industry #alue chain and ho) are they impacted by ecommerce technologyL "hat are four generic business strategies for achie#ing a profitable businessL

2  0  0  8  9  3  5  8 1 4

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Re#ie)

PROJECT! 1.

*elect an e-commerce company. isit its "eb site and describe its business model based on the information you find there. Identify its customer #alue proposition+ its re#enue model+ the marketspace it operates in+ )ho its main competitors are+ any comparati#e ad#antages you belie#e the company possesses+ and )hat its market strategy appears to be. 6lso try to locate information about the company(s management team and organizational structure. 7Check for a page labeled Fthe Company+G F6bout s+G or something similar.;

2.

!amine the eperience of shopping on the "eb #ersus shopping in a traditional en#ironment. Imagine that you ha#e decided to purchase a digital camera 7or any other item of your choosing;. ,irst+ shop for  the camera in a traditional manner. Describe ho)

)ould do so 7for eample+ ho) you )ould gather the necessary information you )ould need to choose a particular item+ )hat stores you )ould #isit+ ho) long it )ould take+ prices+ etc.;. Eet+ shop for the item on the "eb. Compare and contrast your eperiences. "hat )ere the ad#antages and disad#antages of eachL "hich did you prefer and )hyL 3.

isit eBay and look at the many types of auctions a#ailable. If you )ere considering establishing a ri#al specialized online auction business+ )hat are the top three market opportunities you )ould pursue+ based on the goods and auction community in e#idence at eBayL :repare a report or slide presentation to support your analysis and approach.

4.

During the early days of ecommerce+ first-mo#er ad#antage )as touted as one )ay to success. An the other hand+ some suggest that being a market follo)er can yield re)ards as )ell. "hich approach has pro#en to be more successful/ first mo#er or follo)erL Choose t)o ecommerce companies that pro#e your point+ and prepare a brief presentation to eplain your analysis and position.

5.

:repare a research report 73 to 1 pages; on the current and potential future impacts of e-commerce technology on the book publishing industry.

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