E-COMMERCE THEORY

AND APPLICATIONS
Chapter 03: E-commerce
Business Models
 Learning Objectives
• Defining of Business Model, Business
Plan.
• Describe the key elements of
Business Model
• Explain how E-Commerce changes
industry structure
• What is Industry Value Chain?
•
•
 Definitions
• Business model
– Set of planned activities designed to
result in a profit in a marketplace
• Business plan
– Describes a firm’s business model
• E-commerce business model
– Uses/leverages unique qualities of
Internet and Web
8 Key Elements of a Business
Model
1.Value proposition
2.Revenue model
3.Market opportunity
4.Competitive environment
5.Competitive advantage
6.Market strategy
7.Organizational development
8.Management team
 Value Proposition
• Defines how a company’s product or service
fulfills the needs of customers
• Questions to ask:
– Why will customers choose to do business
with your firm instead of another?
– What will your firm provide that others do
not or cannot?
• Examples of successful value propositions:
– Personalization/customization
– Reduction of product search, price discovery
costs
– Facilitation of transactions by managing
product Copyright
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 Revenue Model
• Describes how the firm will earn
revenue, generate profits, and
produce a superior return on
invested capital
• Major types:
– Advertising revenue model
– Subscription revenue model
– Transaction fee revenue model
– Sales revenue model
– Affiliate revenue model
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 Advertising Revenue Model
• Web site that offers content, services
and/or products also provides a
forum for advertisements and
receives fees from advertisers
• e.g. Google AdWords.

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Subscription Revenue Model
• Web site that offers users content or
services charges a subscription fee
for access to some or all of its
offerings
• Examples:
– Yahoo Mail Plus

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 Transaction Fee Revenue
Model
• Company that receives a fee for
enabling or executing a transaction
• Examples:
– eBay.com
– E-Trade.com

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 Sales Revenue Model
• Company derives revenue by selling
goods, information, or services to
customers
• Examples:
– Amazon.com
– LLBean.com
– Gap.com

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 Affiliate Revenue Model
• Sites that steer business to an
“affiliate” receive a referral fee or
percentage of the revenue from
any resulting sales
• Example:
– MyPoints.com

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 Market Opportunity
• Refers to a company’s intended
marketspace and the overall
potential financial opportunities
available to the firm in that
marketspace
– Marketspace – the area of actual or
potential commercial value in which
a company intends to operate
• Realistic market opportunity is
defined by revenue potential in
each of market niches in which
company hopes to compete
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 Marketspace and Market
Opportunity in the Software
Training Market

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 Competitive Environment
• Refers to the other companies selling
similar products and operating in the
same marketspace
• Competitive environment for a
company is Influenced by:
– how many competitors are active
– how large their operations are
– what market share for each competitor
is
– how profitable these firms are
– how theyCopyright
price their
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Education, Inc.
 Competitive Environment
• Direct competitors – companies that
sell products or services that are
very similar and into the same
market segment
– Example: airasia.com and
malaysiaairlines.com
• Indirect competitors – companies
that may be in different industries
but that still compete indirectly
because their products can
substitute for one another
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– Example: CNN.com and ESPN.com
 Competitive Advantage
• Achieved when a firm can produce a
superior product and/or bring product
to market at a lower price than most,
or all, of competitors
– First mover advantage
– Unfair competitive advantage
• Perfect market: No competitive
advantages or asymmetries
• Leverage: When a company uses its
competitive advantage to achieve
more advantage in surrounding
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 Competitive Advantage
• When a firm sustains profits that
exceed the average for its industry,
the firm is said to processes a
competitive advantage over it
competitor.
• Competitive advantage exits when the
firm is able to deliver the same
benefits as competitors but at a lower
cost (cost advantage), or deliver
benefits that exceed hose of
competing product (differentiation
 Competitive Advantage
• Cost advantage
– Allows companies to sell goods or
provide service at a price lower than
the competitor.
• Differentiation advantage
– Goods or services provided have some
quality that makes them more
attractive than competing products
even though the competition may have
a lower price.
• Focus
– Concentration on a single aspect of the
market, a price niche.
 Competitive Advantage using
EC
Force System Competitive advantage
New entrants / substitutionInternet Reduce entry cost
E-commerce New sales channel

New services opportunities

Supplier / trade buyer E-commerce Cost reduction

Quick response

lock in

Buyer (consumers) Internet New sales channel

E-commerce Dis-intermediarisation

Customer information

Competitive rivalry E-commerce Cost leadership

Differentiation

Focus
 Market Strategy
• A plan that details how a company
intends to enter a new market and
attract customers
• Best business concepts will fail if not
properly marketed to potential
customers

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 Market Mechanism
• Functions of EC merchant server
software of a website:
– E-catalogs
– Search engines and Intelligent agents
– Shopping carts
 E-catalogs
• The presentation of product
information in an electronic form.
• They consists of a product database,
directory and search capabilities,
and a presentation function.
 Three dimensions of E-
Catalogs
• The dynamics of the information
presentation.
– Catalogs may be static or dynamic.
• The degree of customization
– Catalogs may be standard or
customized (useful in B2B).
• Integration with business process.
– Catalogs classified according to the
degree of integration with business
processes or features.
 E-catalogs versus Paper
catalogs
Type Advantages Disadvantages

Paper Easy to create Hard to update

catalogs Reader able took without computer system Limited number of products
More portable than electronic Limited information

No advanced multimedia

Online Easy to update Difficult to develop catalogs

catalogs Able to integrate with purchasing process Large fixed cost

Good search and compare capabilities Need for customer skill to deal

Able to provide timely, up-to-date product information with computers and browsers
Provision for globally broad range of product information

Can add on voice and animation picture

Long-term cost savings

Easy to customize

More comparative shopping

Ease of connecting order processing, inventory processing,

and payment processing to the system

 Search Engine and Intelligent
Agents
• Search engine
– A computer program that can access
databases of Internet resources,
search for specific information or
keywords and report the results.
– E.g. Google, Alta Vista, Lycos.
• Intelligent agent
– can do more than just “search and
match.”
– Has capabilities that can be used to
perform routine tasks that require
intelligence.
– E.g. mysimom.com, froogle.com
 Shopping Carts
• E-Shopping Carts is an order-processing
technology that allows customers to
accumulate items they whish to buy
while they continue shopping.
• Shopping cart software:
– Sold or provided for free as an
independent component. E.g.
monstercommerce.com, easycart.com
– Embedded in merchants’ server. E.g.
smallbusiness.yahoo.com/merchant
– Free online shopping carts (trial and
demos). E.g. volusion.com,
gomerchant.com
Organizational Development
• Describes how the company will
organize the work that needs to be
accomplished
• Work is typically divided into
functional departments
• Move from generalists to specialists
as the company grows

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 Management Team
• Employees of the company
responsible for making the business
model work
• Strong management team gives
instant credibility to outside
investors
• A strong management team may not
be able to salvage a weak business
model, but should be able to
change the model and redefine the
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 How the Internet and the Web
Change Business
• E-commerce changes industry
structure by changing:
– Basis of competition among rivals
– Barriers to new entry
– Threat of new substitute products
– Strength of suppliers
– Bargaining power of buyers


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 C o m p e titive riva lry a m o n g
existin g firm s
• The final force is the competition
between existing forms in the
market.
• The competition is to get buyers and
to trade at a price that produces an
acceptable profit.
• That competition is won on the basis
of the generic competitive
advantage of price, differentiation
and focus.
• The competitive position of each
 C o m p e titive riva lry a m o n g
existin g firm s
• EC is a factor in competition between existing
firms.
• The use of EC can:
– Reduce the administrative cost of trading
(transaction cost).
– Increase the logistics efficiency of the supply chain
and hence facilitate reduced stockholding greater
reliability of supply.
– Meet requirements of a trading partners that trade is
conducted electronically.
– Differentiate the product or service that is offered
from that of competitor organisation.
– Cut out intermediaries in supply chain. E.g. replacing
ticket sales through an agent with direct sales to
the public.
 Tre a t o f n e w e n tra n ts
• The treats of new entrants relates to the
ease with which a new company or a
company in different product area can
enter a given trade sector.
• Barrier to enter into a particular market
includes the need for capital, knowledge
and skills.
• It can be a barrier to a given market place:
– Existing players in the sector may well have
a substantial investment in IS/IT. E.g. the
use of EDI to co-ordinates their supply
chain.
 Tre a t o f n e w e n tra n ts
• On the other hand, existing firms with heavy
investment in expensive and obsolescent
technologies give new entrants the opportunity
to enter the market with fresh ideas and a
business plan facilitated by a new generation of
IT provision.
• Internet EC can facilitate new entrants to existing
markets without the need to match the IT and
infrastructure investment of the existing firms.
• E.g. online bookstores, Internet banks.
 Treat of substitute product or
services
• Substitution is a threat to existing firm where a
new product becomes available that supplies
the same function as existing product or
service. E.g. glass bottles and plastic bottles.
• Existing players can protect themselves by
keeping their product up-to-date or become
major firms in the business or supplying the
substitute product. E.g. in IT, typewriter to word
processor.
• E.g. Internet commerce has the potential of
making significant inroads into traditional retail
sectors with online banking or downloaded
music.
 The bargaining power of
suppliers
• Firms would always try to get
favourable terms from suppliers at
the next stage along with the value
chain.
• The firm’s ability to get good deal is
the mirror image of its position with
its buyers.
• If there is a surplus of
supply/suppliers, the firm can get a
good price, vice versa.
 The bargaining power of
suppliers
• For supplier, the strategies of price
advantage and differentiation such
a branding or quality of service give
a stronger competitive position.
• The ability to trade electronically is a
factor in the quality service and
may be a requirement of trade from
the buying organisation.
•
 The bargaining power of
buyers
• When there are a number of
competitors or surplus of supply,
the buyer has a strong position to
bargain for a low price and for
other favourable conditions.
• The bargain strength of the buyer is
of least threat to the low cost
producer, this firm can agree to
tight terms of trade that the
competitor firm could not profitably
 The bargaining power of
buyers
• The use of IS/IT may help companies
achieve efficiencies that enable
them to meet the price
requirements of the powerful buyer.
• Another approach is to use ICTs to
facilitate a level of service that will
keep the customer loyalty. E.g.
short cycle times, quick response
supply and reliable services.
 Industry Value Chains
• Set of activities performed by
suppliers, manufacturers,
transporters, distributors, and
retailers that transform raw inputs
into final products and services
• Internet reduces cost of information
and other transactional costs
• Leads to greater operational
efficiencies, lowering cost, prices,
adding value for customers
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 E-commerce and Industry

Value Chains
Figure 2.5, Page 103

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 Firm Value Chains
• Activities that a firm engages in to
create final products from raw
inputs
• Each step adds value
• Effect of Internet:
– Increases operational efficiency
– Enables product differentiation
– Enables precise coordination of steps in
chain
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E-commerce and Firm Value
Chains

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SOURCES and REFERENCES
• Prepared from the books and other
supplementary materials of the
books and their ppt presentations
– Kenneth C. Laudon and Carol Guercio
Traver; 2008; E-commerce,
business, technology and
society;Addison Wesley
– Efraim Turban; 2009 Electronic
Commerce 2010, A Managerial
Perspective; Prentice Hall
–